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Commerce and Fn^ance 



Designed as a Text Book for Schools and 
a Volume of Business Information 
for the General Reader. 



By O. M. POWERS 

Principal of the Metropolitan Business College 
Author of The Complete Accoiuitayit, Etc, 



CHICAGO: 

Powers & Lyons 



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BY 

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PREFACE. 



As a consequence of the diffusion of general intelligence, the 
improvement in means of transportation, and the rapid transmis- 
sion of information, the business world of to-day is more highly- 
organized, its interests more intimately connected and interwoven, 
and its methods more complex and intricate than ever before. To 
meet present conditions the successful business man of to-day must 
possess a broader and more intelligent view, as well as a readier 
comprehension of all those problems which enter into business life. 
He must be conversant in a degree with the operations, silent 
though powerful, going on about him. In short, he must be better 
educated. In the preparation of this book the aim has been to bring 
together a mass of important facts and information of a business 
nature not found in books generally, or not found in concise, tang- 
ible or logical form, and present the various subjects so clearly 
that the ordinary reader or student may readily grasp them. 

The book is a combination of history and economics. It relates 
to both the past and present. In the first 146 pages of the book, 
embracing a history of commerce and of banking, a foundation is 
laid for the proper consideration of the subjects which follow. In 
dealing with historical facts we have aimed to show why commerce 
flowed in certain channels at certain times and the influences which 
have affected its progress and development. In the discussion of 
the various subjects which follow, the aim has constantly been to 
reach the basic principles underlying each, to discover the theories 
upon which business is done. Necessarily the subjects could not be 
treated in exhaustive detail in a work of this size, but the most 
important features are set forth, and a basis is thus furnished for 

5 



6 PREFACE. 

those who wish to pursue any special line of study farther into its 
details and intricacies. 

The author gratefully acknowledges himself indebted for valu- 
able assistance and suggestions in the preparation of this work to 
Mr. Fred W. Gookin, formerly cashier of the Northwestern National 
Bank of Chicago; Mr. F. H. Rawson, Vice-President Union Trust 
Co., Chicago; Mr. H. P. Simonton, Corporation Attorney; Mr. C. S. 
Pellet, Ex-President Chicago Board of Underwriters; Mr. J. H. 
Emerson, General Agent New Tork Life Ins. Co.; Mr. Chas. D. 
Snow, of the Chicago Board of Trade; Mr. W. E. Ray, of the Chicago 
Journal; Mr. B. J. Fitzgerald, Real Estate Broker; Mr. John F. 
Scanlan, of the Custom House; Mr. W. A. Douglass, Manager of 
R. G. Dun & Co., Chicago; Mr. John E. Gardin, Manager Foreign 
Exchange Department First National Bank, Chicago, and many 
others, and yet these gentlemen are in no way responsible for any 
possible errors or inaccuracies of statement that may appear in this 
book. 

O. M. P. 

Chicago, September 1, 1903. 



1 



CONTENTS 



HISTORY OF COMMERCE 

PAGE. 

I. ANCIENT COMMERCE. 

Origin of Commerce — Egyptians — Phoenicians — Greeks, 13 

II. ANCIENT COMMERCE— Continued. 

The Carthaginians — The Roman Empire, 19 

III. MEDIEVAL COMMERCE. 

Decline and Fall of Rome — Decay of Commerce — Con- 
fusion and Ignorance — Charlemagne — Venetian Com- 
merce, 27 

IV. MEDIEVAL COMMERCE— Continued. 

Decline of Venice — Commerce of Genoa, Florence and 
Pisa — ^Effect of Discovery of America, 36 

V. MODERN COMMERCE. 

The Cape Route to India — Portuguese Commerce — 
Spain's Vast Possessions — Expulsion of the Moors — 
Dutch Commerce, 46 

VI. COMMERCE OF GERMANY. 

Hanseatic League — Effect of Thirty Years* War — Revival 
of German Commerce — Zollverein — Present Commerce, 56 

VII. COMMERCE OF FRANCE. 

Flemish Commerce and Manufactures — Age of Louis 
XIV — Colonial Possessions — Revocation of the Edict of 
Nantes, 64 

VIII. COMMERCE OF FRANCE— Continued. 

Colbert — John Law — The French Revolution — Napo- 
leon's Policy — Recent French Commerce, . . . • . 72 

IX. COMMERCE OF ENGLAND. 

Before the Roman Conquest — English Wool — Eliza- 
beth's Policy — Carrying Trade, 81 

7 



8 CONTENTS. 

X. COMMERCE OF ENGLAND— Continued. page. 

Manufacturing— Postal System — Ban king — Speculation 
—Colonial Policy 93 

XI. COMMERCE OF THE UNITED STATES. 

Colonial Period— Financial Policy— War of 1812, . . 106 

XII. COMMERCE OF THE UNITED STATES— Continued. 

Revival of Manufacturing — Tariff Laws — Slavery — Civil 
War, 119 

XIII. COMMERCE OF THE UNITED STATES— Continued. 

Growth of Industries — Inventions and Discoveries — 
Foreign Trade, 132 

MONEY. 

Xiy. NATURE AND USE OF MONEY. 

As an Element in Civilization — Bands — Barter — Essen- 
tials of Money, • 147 

Xy. FUNCTIONS AND KINDS OF MONEY. 

Four Functions — Subsidiary Coin — Comparative Value 
of Silver and Gold — Demonetization of Silver, eto-, • . 153 

XVI. THEORIES OF MONEY. 

Coinage — Volume of Money — Substitutes — Monometal- 
lism — Bi-Metallism, . . .161 

HISTORY OF BANKI>^G. 

XVII. PRIMITIVE BANKING, 

Bank of Venice — Amsterdam Wisselbank — Bank of 
France— French System, 168 

XVIII. ENGLISH BANKING. 

Bank of England — Peel's Act, 1844 — One Reserve — 
Banking and Issue Departments, 178 

XIX. ENGLISH MONEY SYSTEM. 

Bank of England — Immense Responsibility as Keeper 
of the Reserve — Bank Rates — Management, . . . .187 

XX. GERMAN BANKING. 

Reichsbank — Elasticity of German Currency — Stability 
— Russian Banking, 196 

XXI. SCOTCH AND CANADIAN BANKING. 

Scotch System — Branch Banks — Canadian System — 
Asset Banking — Elasticity, 204 



CONTENTS. 9 

XXII. BANKING IN THE UNITED STATES. page. 

Colonial Period — Bank of North America — Hamilton's 
Views — First United States Bank — State Banks, . . .213 

XXIII. BANKING IN THE UNITED STATES— Continued. 

Second United States Bank — The Great Bank War — 
Suffolk Bank System— Safety Fund System— Wild Cat 
Banking, 225 

XXIV. BANKING IN THE UNITED STATES— Continued. 

National Banking System — Organization — Reserve — 
Circulation — Sub-Treasury System, 233 

XXV. BANKING IN THE UNITED STATES— Continued. 

State Banks —Private Banks — Savings Banks — Trust 
Companies, 244 

XXVI. BANKING IN THE UNITED STATES— Continued. 

The United States Treasury, 252 

BANK CLEARING HOUSE. 

XXVII. SETTLEMENTS BETWEEN BANKS. 

History — Objects — Methods — Clearing House Certificates, 262 

BORROWING AND LENDING MONEY. 

XXVIII. THE USE OF CREDIT. 

The Money Market — Call Loans — Collaterals — Note 
Brokers 271 

CORPORATIONS. 

XXIX. CHARACTER OF CORPORATIONS. 

Formation — Promotion — Kinds of Stock — Watering 
Stock— Dividends, 282 

XXX. CORPORATIONS— Continued. 

Directors— Duties of Officers — By-Laws — Records, . . 293 

XXXI. CORPORATIONS— Continued. 

Subsidiary Corporations— Control and Manipulations, . 300 

XXXII. CORPORATIONS— Continued. 

Combinations — Trusts — Promotion — Underwriting, . . 305 

XXXIII. CORPORATIONS— Continued. 

Receiverships — Reorganizations, 313 



10 CONTENTS. 

BONDS. PAGE. 

XXXIY. GOVERNMENT AND CORPORATE OBLIGATIONS. 

Kinds — Refunding— Negotiating — Foreclosure, . . . 319 

SECURITES AND INVESTMENTS. 

XXXV. BONDS, STOCKS AND MORTGAGES. 

Governments— State and Municipal — Kinds of Mortgage 
Securities, ....*.... 328 

COMMERCIAL CREDITS. 

XXXVI. OUR CREDIT SYSTEM. 

Assets—Losses — ^Limit of Credit — Machinery of Credit, 336 

PURCHASE AND SALE OF REAL ESTATE. 

XXXVII. LANDED PROPERTY. 

Titles — ^Values— Ninety-Nine Year Leases — Mortgages, 345 

FIRE INSURANCE. 

XXXVIII. INDEMNITY FOR LOSS BY FIRE. 

History — Classes of Companies — Risks — Rates, . . . 354 

XXXIX. FIRE INSURANCE— Continued. 

Boards of Underwriters — Co-Insurance— Losses, . . . 363 

LIFE INSURANCE. 

XL. INDEMNITY AGAINST MISFORTUNE. 

History — Methods — Kinds of Companies — Kinds of 
Policies 370 

XLI. LIFE INSURANCE— Continued. 

Premiums — Dividends — Loans — Annuities — Assessment 
Insurance, 378 

THE STOCK EXCHANGE. 

XLII. DEALING IN SECURITIES. 

Incomes — Investments — Speculation — Gambling in 
Stocks, 884 

XLIII. THE STOCK EXCHANGE— Continued. 

Brokers— Bulls and Bears — Listing Securities, . . . 393 



CONTENTS. 11 

THE PRODUCE EXCHANGE. page. 

XLiy. BOARDS OF TRADE. 

Character — Organization — Members — Benefits to Public, 400 
XLY. THE PRODUCE EXCHANGE— Continued. 

Cash Grain — Futures — Inspection — Bucket Shops, . . 407 

STORAGE AND WAREHOUSING. 

XLVI. BONDED, PRIVATE AND COLD STORAGE WARE- 
HOUSES. 
Importation of Goods — Classes of Bonded Warehouses— 
Restrictions — Cold Storage System, 415 

TRANSPORTATION BY RAIL. 

XLVII. RAILROADING. 

Railroad Ownership — Capitalization — Traffic Associa- 
tions—Pooling — Differential Rates, Etc., 423 

XLYIII. TRANSPORTATION BY RAIL— Continued. 

Classification of Freight — Freight Rates — Cost of Serv- 
ice, Etc 432 

FOREIGN COMMERCE 

XLIX. TRADE RELATIONS WITH FOREIGN COUNTRIES. 
Duties — Reciprocity — Bounties — Subsidies — Naval Pro- 
tection, 438 

L. FOREIGN COMMERCE— Continued. 

International Law — Treaties — Consular Service — Foreign 
Exchange, 445 

FOREIGN EXCHANGE. 

LI. INTERNATIONAL SETTLEMENTS. 

Interchangeable Yalues — Mint Parity — Arbitrage — Gold 
Shipments, 452 

LII. FOREIGN EXCHANGE— Continued. 

Instruments of Exchange — Quotations — The Arithmetic 
of Exchange, • 460 



HISTORY OF COMMERCE. 



CHAPTEE I. 

ANCIENT COMMERCE. 
ORIGIN OF COMMERCE; EGYPTIANS; PHOENICIANS; GREEKS. 

The history of commerce is the history of civilization. In 
his barbarous state man's wants are few and simple, limited to 
his physical existence, such as food, clothing and shelter, but 

as he advances in the scale of intelligence his wants 
wa^^s" increase and he requires not only the comforts and 

conveniences of life but even the luxuries. Civil- 
ized man is never satisfied, for no sooner is a want supplied 
than another arises in its place, and under that stimulus he 
achieves mighty conquests over the forces of nature and attains 
to a high degree of development in character. Commerce is 
one of the means by which various peoples have at different 
times undertaken to supply their needs. 

No civilized community produces all the things which it con- 
sumes. A portion of its needs must be supplied by an inter- 
change of products with other communities or nations and 
this is the beginning of commerce, either domestic or foreign. 
Moreover, it may be impossible for a nation to produce all that 
it needs to consume, owing to physical peculiarities of the 
country, its lack of coal, wood, or ore, its climate, etc. Thus 

England cannot grow sufficient corn to feed its 
PuTsuTtf °^ people, but it manufacturers more cloth than 

is necessary to clothe them. A warm country 
cannot grow wheat successfully, but it may produce cotton or 
rice in abundance. 

13 



14 HISTORY OF COMMERCE. 

Commerce also depends in a measure upon the national skill 
of a people in the manufacture of commodities. The Swiss have 
long been noted for the manufacture of clocks, watches^ and fine 

lace; the French for the production of wine and 
Employments ^^^^' Another nation may be deficient in both the 

possession of natural products and skill as manu- 
facturers, but have peculiar skill as navigators, and become the 
carriers of goods. Such were the Italian cities which, in the 
middle ages, grew opulent from the profits of the carrying trade. 
Then again a nation may combine all three of these functions, 
and become producers, manufacturers and carriers in a greater 
or less degree, reaping a profit from each, as the principal nations 
of Europe, and the United States are doing at the present time. 
The ancient commerce of the world was carried on chiefly 
upon the shores of the Mediterranean Sea. When we read in 
Genesis that Joseph was sold by his brethren for twenty pieces 

of silver to ^^a company of Ishmaelites come from 
E^^t^^^^ ^ Gilead with their camels bearing spicery and balm 

and myrrh, going to carry it down to Egypt,^^ we 
get a glimpse of the ancient commerce of that oldest of empires, 
Egypt, drawing supplies from the thrifty nations to the east of the 
Mediterranean. Caravans of camels laden with goods and silver 
crossed the desert and carried into Egypt wool, ivory, gold-dust, 
spices and slaves from Arabia and the far east. In exchange 
Egypt furnished large quantities of wheat, barley, rice, cotton 
and flax from the fertile valley of the Nile, besides quantities of 
linen, and cotton cloth, as well as utensils and pottery. From 
the nature of the conditions, Egypt has always been essentially 
an agricultural country. The broad, level valley of the Nile, 
enriched annually by the overflow, yielded abundant crops, and 
the people were apparently content with their harvests, devoting 
themselves but little to manufacture or commerce. The sea 
coast was low, with no good harbors, thus uninviting to com- 
merce, while a scarcity of wood made ship-building a practical 



THE PHOENICIANS. 15 

impossibility. The Egyptians cultivated the arts and sciences, 
and their kings busied themselves in erecting those wonderful 
monuments in the form of tombs^, which still remain to a con- 
siderable extent. Although industrious at home^, they did not 
seem inclined to go abroad or engage in foreign trade, and this 
was carried on chiefly by Arabs and Greeks. After the con- 
quests of Alexander the Great, the port of Alexandria became the 
great commercial metropolis of the world, and Greek merchants 
settled there in large numbers. 

The first navigators and carriers of goods by water, of which 
we read, were the Phoenicians who inhabited the narrow strip 
of coast land along the east of the Mediterranean 
Phoenicians ^^^- Having a large sea frontage with little inte- 
rior distance, these people were naturally attracted 
to seafaring occupations. Their coast abounded in good har- 
bors, and their abundant forests supplied the materials for ship 
building, while agriculture was difficult on account of the hilly 
and rocky nature of the land. Here we see the natural con- 
ditions exactly reversed from those of Egypt, with the effect of 
developing a nation of navigators and traders instead of farm- 
ers, as in Egypt. The enterprise and activity of the Phoenicians 
were wonderful. They founded the cities of Tyre and Sidon 
and built up a large and profitable system of commerce. In- 
tellectual activity and diligence in business led these people to 
many discoveries, among which were the making of glass, 
the art of dyeing purple and writing by means of letters. They 
were also distinguished by their skill in casting metals, weaving, 
architecture and in various other directions. Sidonian garments, 
Tyrian purple, Phoenician glass and articles of ivory, gold and 
other metals were precious and coveted wares in all antiquity. 
The forests of Lebanon, along the eastern border, supplied them 
with material for ship-building, and with their oared barks they 
navigated the coast and islands of the sea, trading in their own 
productions and those of the far east, spices, frankincense, oil. 



16 HISTORY OF COMMERCE. 

wine, wheat and slaves. They made their way along the coast, 
and out as far as Cyprus, where they founded a colony, then to 
the islands of the Aegean Sea and Greece to the north, and to 
Egypt and Africa in the south. They ventured 
B. c. 1050 west as far as Spain, which they found rich in 

minerals, especially silver. The discovery of Spain 
with its rich mines brought immense wealth to the Phoenicians, 
and they proceeded to develop the resources of the country with 
vigor. It is said that the Phoenicians drew such vast wealth 
from the mines of Spain that their ships carried silver anchors. 
Besides silver they received from Spain considerable quantities 
of tin, lead, iron and even gold, as well as a large yield of wheat, 
wine, oil, wax, fruit and fine wool. 

The Phoenicians used their possessions in Spain as a basis 
for trading voyages farther west. They passed the straits of 
Gibraltar and went northward among the British isles, where 
they obtained large quantities of tin. Proceeding still farther, 
they entered the Baltic Sea, and visited the rude people in north- 
western Europe, purchasing wool, hides, furs, copper 

Phoenician j xi x i i • • • 1 xi, • 

Voyages ^^^ othcr metals,and givmg m exchange their own 

manufactures, such as purple dyed robes, carpets, 
and fine cloths, works in gold, silver, ivory, amber and glass. 
The Phoenicians imported largely raw materials, which they 
made up in Tyre and Sidon, and then exported the finished 
product either by their own ships seaward or by caravans to the 
east. Thus they were a manufacturing as well as a maritime 
nation. They are said to have rounded the Cape of Good Hope 
on voyages to India about the year B. C. 600. 

This enterprising people became not only masters of the 
Mediterranean Sea, but were instrumental in scat- 
of Civilization teriug the germs of taste and intelligence, elevat- 
ing the standard of civilization and establishing 
a system of commerce throughout a large portion of the an- 
cient civilized world. They no doubt learned the use of gold 



THE GREEKS. 17 

and silver as money from the Babylonians^ but they introduced 
and popularized the use of these metals as money throughout the 
Mediterranean by stamping and issuing coins of both metals in 
various sizes and denominations. The ratio of silver to gold in 
value at that time was about 13 to 1. The Phoenicians also in- 
troduced into commerce a regular system of weights and meas- 
ures^ and the use of bills of exchange, as a means of payment. 
But owing to troublesome wars and confusion caused by the 
contests between the Babylonian and Assyrian empires about the 
eighth century B. C. the commerce of Phoenicia 
The Greeks began to decline, and after the conquest and de- 

struction of the cities by the Greeks under Alex- 
ander the Great, including Tyre, by the celebrated siege which 
lasted seven months (B. C. 332), the commerce of this once 
energetic people passed over to the Greeks, who were then a 
dominant nation in the arts and sciences. The Greeks w^ere 
not essentially a commercial people, being more devoted to art, 
architecture and literature, nevertheless they had observed the 
methods of the Phoenicians and became their competitors to a 
considerable extent in commerce, and having finally conquered 
them, inherited their trade. The Greeks were even greater 
colonizers than the Phoenicians, and established flourishing 
cities in Asia Minor and along the Black Sea, 

The Greeks i?i*i xii • j.j_ 

in Asia many ol which not only became important mari- 

time but manufacturing cities as well. Smyrna, 
founded by the Greeks at that time, is still a flourishing em- 
porium, noted principally for its rugs. These cities became the 
centers for the products of that region, such as cereals, fish, 
timber, salt, leather, wood, skins and slaves. Wheat was the 
most important product and came chiefly from the south of 
Eussia, as it does at the present time, and supplied Athens and 
Corinth with breadstuffs. 

The Greeks founded several colonies in Italy, chiefly in the 
southern portion. They took possession of and cultivated the 



18 HISTORY OF COMMERCE. 

island of Sicily, where the fertility of the soil proved a great 
attraction to settlers, and there built up the rich and powerful 

cities of Agrigentum and Syracuse. These cities 
kTita^^^^^ exported from Sicily large quantities of wheat, 

fruit, wine and oil, and conducted an extensive 
carrying trade with Africa and Egypt. From Italy the 
Greek colonies exported wine and cattle and imported articles of 
Greek manufacture, such as pottery, metal wares and clothing. 
Most of the Greek colonies in Italy, however, gave themselves 
up to a life of pleasure, luxury and ease, and thus in time became 
an easy prey to the more sturdy Eomans. 

Along the north coast of Africa, between Carthage and 
Egypt, the Greeks established a number of settlements, the most 

important of which was Gyrene. A genial and 
kTAfrica^^ healthful climate, combined with a fertile soil to 

bring prosperity, and Gyrene carried on an active 
trade by land with Egypt and the interior of Africa, from which 
it derived horses, grain, oil, dates, amethysts, onyx and precious 
stones, and by sea with Greece, Italy and Asia Minor, exchang- 
ing these products for cloth and wine. As before stated, Greek 
merchants carried on most of the commerce of Egypt, both 
domestic and foreign. 



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CHAPTER II. 

ANCIENT COMMERCE— Continued. 

THE CARTHAGINIANS; THE ROMAN EMPIRE. 

About the year 850 B. C. the Phoenicians had founded the 
city of Carthage on the north coast of Africa, planting there a 
colony which was destined to have a remarkable career. The 
Commerce ^^^J ^^^ built upou a pcninsula forty-five miles 

of the around, with a neck only three miles across. The 

arthaginians j^^^ along the adjacent coast was fertile and well 
watered, producing wheat, barley, wine and oil in abundance. 
A small bay in the gulf of Tunis afforded an excellent harbor 
for the city^s commerce. Endowed wdth Phoenician energy and 
skill, Carthage soon gained great wealth and power, conquering 
a portion of Sicily and the northwest coast of Africa, thereby 
securing complete control of the western half of the Mediter- 
ranean Sea. 

The Carthaginians founded colonies in the South of Spain, 
and the riches of the Spanish peninsula were poured into the lap 
of Carthage. Her ships passed the strait of Gibraltar and con- 
tinued the voyages formerly made by the Phoenicians to the 
north. They also turned southward, sailing along the west 
coast of Africa in search of tropical products. They sent cara- 
vans into the interior of Africa and Persia and as far east as the 
Persian Gulf. Hither were brought gold, ivory, slaves, ostrich 
feathers, ebony and dates, and in exchange the Carthaginian trad- 
ers exported wheat, meal, wine, ornaments and gaudy clothes, much 
the same as worn by many of those peoples at the present day. 

After the Persian conquest, many of the merchant princes of 
Tyre and other Phoenician cities emigrated to Carthage, and 
thus the city grew in wealth and commerce. At one time she 

19 



20 HISTORY OF COMMERCE. 

is said to have possessed territory having a sea line of 1,400 
miles and containing 300 cities. In the silver mines of Spain 
she employed not less than 40,000 men. The 
ofCa?thage^^^ Carthaginian merchants did not carry for hire, 
but dealt in their own commodities, thus requiring 
an extensive system of warehouses and shipping facilities. They 
inaugurated a system of marine insurance and made loans on 
bottomry. It has been supposed that their leathern money was 
in the nature of bank bills. 

Thus we see that Greece controlled the commerce of the 
eastern half of the Mediterranean Sea, while Carthage dominated 
that of the western half. Both of these nations reached their 
golden era of prosperity, their commercial zenith, about three 
hundred years before Christ; both declined and gave way to a 
stronger power about the same time, and to the same power. 
While these nations were thus dominating the commerce of the 
Mediterranean there was growing a power in Italy that was to 
conquer and supplant them both. Like the sturdy tree which 
grows slowly that it may knit its fibers closely, Eome required 
five hundred years before she was sufficiently strong to wrest 
the commercial and political supremacy of the Mediterranean 
from Greece and Carthage. She was founded about 750 B. C. 
and began her conquest against Carthage and Greece about 
250 B. C. 

The dividing line between Greece and Carthage seemed to 
bisect the island of Sicily. The western half belonged to Car- 
thage and the eastern half to Greece. Carthage attempted the 
conquest of the eastern half of the island. This 
ofcarthage^ led to a dcspcratc struggle with Syracuse and the 

Greek colonies. Then Eome and Carthage began 
a contest which lasted with varying results for over a hundred 
years. It was in many respects the most determined and relent- 
less warfare ever waged, and both parties seemed to realize that 
it was a fight to the finish, and must result in the extermination 



CARTHAGE. 31 

of the one power or the other. The First Punic War lasted from 
264 to 241 B. C, when Carthage was defeated and compelled 
to give up Sicily^ Sardinia and Corsica. After twenty-three 
years, war was again declared between these two inveterate 
enemies^ and in 218 B. C, Hannibal^ the great Carthaginian 
general;, led an army by way of Spain over the Alps into Italy, 
and at one time it seemed as if Rome would be completely 
crushed beneath his mighty blows. But the tide of war turned 
again, and the Carthaginians were defeated and made a de- 
pendent province of Eome. Finally, in the Third Punic War, 
B. C. 149, the Romans utterly destroyed the city of Carthage, 
carrying its inhabitants who survived the siege into captivity, 
burning its houses and demolishing its temples. INTot content 
with even this, they plowed the land where Carthage had stood, 
sowed it in salt, thus making it utterly barren, and then 
pronounced a curse upon any one who should attempt to rebuild 
the city. Could revenge be deeper of more complete? Un- 
fortunately, for us, they also destroyed the libraries and records 
of this remarkable people, so that all we know of them has come 
down to us through their enemies. We are told that Carthage 
was a city twenty miles in circumference, and contained not less 
than one million inhabitants. The land about the city was laid 
out like a vast garden, and embellished with innumerable mag- 
nificent villas. 

In the same year, Corinth, one of the greatest of the Greek 
capitals and seaports, was captured, plundered of vast wealth 
and given to the flames by the Romans. Athens and her mag- 
nificent harbor of Piraeus fell into the same hands sixty years 
later, and thus the seat of commercial greatness moved westward 
to the banks of the Tiber. 

The Romans were naturally statesmen and warriors rather 
than merchants. They were better adapted to govern than to 
trade or work. With Roman supremacy, set in an era of growth 
and activity in trade and commerce throughout the then civil- 



22 HISTORY OF COMMERCE. 

ized worlds which lasted five 'hundred years. The eflEect of 
Eoman domination was to put an end to all the little wars that 
had been previously waged among adjacent peo- 
Su'^emac P^^^* "^^ becoming Eoman provinces they ex- 

changed their independence for peace^ and peace 
with unrestricted commerce fostered trade in all parts of the em- 
pire. The Mediterranean nations were brought closer to each 
other^ both politically and commercially, and became common in- 
heritors of such knowledge as was then in the world. Arts, sciences, 
improved agriculture and manufactures spread among them. The 
city of Eome became the center of the system, and from one 
quarter wheat had to be brought, from another clothing, from 
another luxuries, and Eome had to pay for it all in coin. She 
had nothing to export in return. How could she continue to 
pay out coin? The coin was continually flowing into her treas- 
ury, as tribute from all of her numerous provinces, and then it 
found its way back again to the provinces in payment for mer- 
chandise. By this there was a tendency to an equalization of 
wealth in all parts of the empire, and a perpetual movement of 
money. 

Eome, in its golden era of the Emperor Augustus, had a 
population of 1,800,000 people, besides its numerous suburbs, 
and to supply the needs of this vast population required a large 
number of merchants and tradesmen. Besides these, extensive 
industries were carried on by skilled labor to sup- 
imi^stries of ^j^ ^^^ dcmauds of the rich and idle class. Plu- 
tarch tells us that there were trade-guilds in wood- 
carving, moulding, dyeing, lace-making, cabinet-making, and 
among workers in bronze, stucco and gold. There were extensive 
establishments for the manufacture of glass and pottery, both in 
Eome and other Italian cities. Cloth and clothing were made by 
the weavers of Eome in large quantities, the wool coming prin- 
cipally from Spain and the cotton from Egypt. The arts of 
paper-making and book-binding were carried to a much higher 



ROME. 23 

degree of perfection than ever before^ and in all the great abbeys 
and museums there was an apartment — the Scriptorium — for the 
copying and making of books. 

In order to facilitate their military operations^ the Romans 
built an extensive system of highways, the finest the world had 
ever seen. Beginning at the Golden Milestone, which was placed 

in the Forum by Augustus to mark the central 
Roman Roads poiut of the Eomau Empire, and from which 

distances were calculated, these roads extended in 
a network in all directions over Italy, and reached as far as 
France, Spain and Britain in the west. In Greece, the moun- 
tains of Epirus and Macedon were pierced with a great highway, 
and in Asia Minor, Palestine and North Africa they built roads 
leading to the principal seaports. These Eoman roads were 
built with a view to permanency, and many of them remain as 
important and useful highways of commerce to this day. Won- 
derful examples of engineering skill are frequently exhibited 
in their construction, being in some instances hewn out of the 
mountain side and in others composed of heavy stone viaducts 
and bridges which still remain to attest the skill of the builders. 
These roads were as useful to Eome as railroads are to us. They 
were furnished with milestones and post houses kept in perfect 
order. A regular system of posts was established so that the 
Emperor might have speedy information of events happening 
in the different provinces. The postmen traveled according to 
regular time tables, changing horses at each relay, the same as 
in this country before the advent of railways. Although built 
primarily for military purposes, so that troops could be con- 
veyed readily to any part of the Empire, yet these roads and the 
post system were highly instrumental in fostering and develop- 
ing commerce as well as civilization in general. 

We will now take up the consideration of the Eastern prov- 
inces of Eome, and by these we mean Greece and the Greek 
Islands, Asia Minor, Phoenicia, Palestine, Egypt and the north 



24: HISTORY OF COMMERCE. 

coast of Africa. These provinces were all placed in immediate 
and direct communication^ not only with each other, but with 
Eome, and the laws were so framed as to protect intercourse and 
Roman Com. commcrcc generally, but especially with the seat 
East^ern" ^ ^^ government. Greece had become considerably 
Provinces rcduccd in population, especially in her island 

colonies, and agriculture declined. The result was that large 
areas were now given to grazing and the raising of sheep and 
horses. This supplied wool for cloth and horses for the Eoman 
army and for the chariots and other vehicles. Athens supplied 
Eome with statuary, cloth and perfumery, Corinth with bronze, 
and Paros with the finest of marble. Asia Minor and ports of 
the Black Sea carried on an extensive trade and manufacture, 
supplying Eome with cloths of superior texture, carpets, works 
of art in marble, bronze, gold and silver. Through these cities, 
too, came a large portion of Eoman imports from the far East — 
Persia, India and China — slaves, precious stones, silks and per- 
fumes. From Syria and Phoenicia came rugs, glass, pottery, 
purple dyes, cedar-wood and woodenware. Egypt sent to Eome, 
through its commercial metropolis, Alexandria, immense quanti- 
ties of wheat, barley, cloth and colored glass. It also forwarded 
the slaves, ivory and ostrich feathers of Africa; perfumes, in- 
cense, gold and horses from Arabia; spices, cinnamon, ginger, 
myrrh, precious stones, pearls and silk from India. Large 
quantities of grain came from the north coast of Africa, where 
the Carthaginians had formerly cultivated the rich soil, and wild 
beasts from the desert farther south supplied the Eoman arena. 
The western provinces of Eome were also very prolific. 
Spain was the richest province. Her mines yielded fabulous 
Western amouuts of gold and silver, as they had previously 

Commerce of douc for the Phocnicians and Carthaginians, be- 
°"^^ sides large quantities of iron and copper. Spain 

also produced an abundance of wool of a superior quality, besides 
wheat, oil, fruit, honey, wine, dyes, pitch, salt and horses. From 



ROMAN SLAVERY. 25 

France came wine, oil, wheat, millet, honey and cattle. The 
rivers of France flowed chiefly in the direction which aided in 
transporting products to Eome, and these, supplemented by the 
excellent highways built by the Eomans, facilitated commerce. 
Marseilles was then, as it is now, the principal port of shipment 
from southern France. The products of the British isles were 
conveyed to Eome partly by ships which rounded Gibraltar and 
partly by overland routes through France. These products con- 
sisted of tin and iron, cattle, leather, pearls, oysters, slaves, jet, 
and far-famed hunting dogs. The mountaineers of northern 
Italy and the Alps sent resin, pitch, honey and wax, while Sicily 
on the south sent cattle, wool, honey, wine and valuable cloths, 
made chiefly at Malta, whose weavers were far-famed for their 
skill. 

In commenting upon the commerce of Ancient Eome we must 
remember that nearly all of the labor of the Empire was per- 
formed by slaves. It had been the custom from remote antiquity 
for the conqueror in war to carry off those whom he had spared, 
and compel them to cultivate his fields and otherwise serve him 
as slaves. Many ancient wars were instigated and 
siaven^ conducted for the purpose of supplying the de- 

mand for labor. Eome was no exception to this 
rule. Livy and Plutarch tell us that when Sicily and Greece 
were subjugated by Eome portions of them were depopulated. 
At the conquest of Epirus by the Eoman general, Paulus Aemil- 
ius, 150,000 persons were either murdered or carried away into 
slavery, and at the destruction of Carthage 50,000 persons were 
carried into Eoman slavery. At the taking of Thebes large 
numbers were thus disposed of, and these not the lower but of 
the well-to-do and respectable classes. To these slaves the 
laws of Eome were villainously unjust. A slave could be mur- 
dered on the slightest provocation, or forced into the arena to 
contend with wild beasts for the entertainment of the people. 
One statute provided that in case a slave owner was murdered. 



36 HISTORY OF COMMERCE. 

not only all of the slaves within his house^ but even those within 
a circle supposed to be measured by the reach of his voice, 
should be put to death. Such laws show the small value placed 
upon the lives of these unfortunates^ and the facility with which 
they could be replaced. The great number of slaves necessitated 
a vast military system to control them. Now and then they 
arose in insurrection, but usually paid the severest penalty as a 
result. All kinds of labor were assigned to the slaves and regarded 
as contemptible by the Eomans. Slaves tilled the soil, rowed 
the galleys and performed the work of manufactures. The 
carpenters, masons, weavers, and, to a considerable extent, the 
copyists of books were slaves. Eich men owned large numbers 
of them, the price of a slave being, in the public market, only 
equivalent to $25 of our currency. Slave labor was actually 
cheaper than animal labor, so that much of the work which we 
assign to horses and cattle was performed by men. The result 
of this was to debase labor and destroy that class of intelligent, 
sturdy and independent workmen and artisans in which the 
strength of a nation chiefly rests. Although commerce flour- 
ished for a time under the Eoman empire, it had beneath it this 
system of injustice and inhumanity, and could not be permanent. 
It flourished principally because of the vigorous system of gov- 
ernment established by the Eomans, better roads and means of 
intercourse between different countries and provinces, and better 
protection against pirates. Thus we see the influence of govern- 
ment upon commerce. 









-c 









v.^^'^ 



^MAP OF 

The Koinaii Empire 

At Its Greatest Extent, 
A. 1). 200. 






\ A " Berenice/t 



A^^sHio^t"^1 



^L 



r 



StALE ov Mil lis 
I iZ. ^. UittUtt, Etiffraver, Chicuijo . i 



TRADE ROUTES:- WiATER . 
LAND 



15^ 



Lontjitude 20° 



30° 35' 40 45' 50 55 




CHAPTER III. 

MEDIEVAL COMMERCE. 

DECLINE AND FALL OF ROME; DECAY OF COMMERCE; CONFUSION 
AND IGNORANCE; CHARLEMAGNE; VENETIAN COMMERCE. 

About the middle of the fourth century the Roman power 
began to decline. It had held unbounded sway over an immense 
empire for five hundred years, and had created a high degree 

of civilization and an extensive commerce among 
Commerce ^^^ ^^ ^^^ diversified provinces, but riches finally 

brought luxury and corruption, internal dissen- 
sions weakened the state, and wars, with bad government, de- 
stroyed, in a large measure, the commerce of the empire. 
Excessive taxation and extortion seriously crippled the pros- 
perity of the provinces. Thus Brutus made Asia Minor pay five 
years^ tribute at once, and shortly after Anthony compelled it 
to do the same thing again. To bolster up the failing revenues 
of the state and supply needed money for the extravagance and 
profligacy of Rome, the coinage was debased by reducing its 
weight and increasing the alloy. Thus under Vespasian the 
silver coin consisted of one-fourth copper and three-fourths pure 
silver. This was later reduced to one-third copper and two- 
thirds silver, then to one-half copper, and finally the coin of the 
realm contained but about one per cent, of silver, tin being sub- 
stituted. From such debasement of the coin it was only a short 
step to the repudiation of debts, and this step was often at- 
tempted by the demagogues. Law ceased to have any value. 
A suitor must deposit a bribe before a trial could be had. The 
increase of immorality proceeded. The virtues which had 
adorned the earlier history of Rome disappeared, and in the 
end were replaced by crimes such as the world had never before 

witnessed. 

27 



28 HISTORY OF COMMERCE. 

To the north of the Eoman Empire^ occupying what is now 
France^ Austria^ Germany and Eussia, had grown up powerful^ 
semi-barbarous tribes of sturdy hunters and warriors. These 
^^barbarians/^ as they are called^ were of immense stature, 
dressed mostly in skins, were well mounted on a superior breed 

of horses, and used the customary shields, helmets 
Barbarians ^ ^^^ othcr implements of war. They had some 

semblance of laws, but paid no taxes, and their 
civilization and commerce were of the rudest character. These 
rugged tribes, known as the Goths, Vandals, Franks, and by 
other names, had given the Romans trouble along the border all 
through the second and third centuries, and frequent expeditions 
had been sent out to quiet or subdue them. They had been 
students of Eoman discipline and methods of warfare, and some 
of them had even enlisted in the Eoman army for this purpose, 
and thus, as the power and internal strength and prosperity of 
Eome began to decline, these hardy peoples, which had not been 
enervated by luxury, were in a condition to dispute Eoman 
supremacy. The Eoman Empire had been divided in the year 
364 into two parts, with two capitals, viz.: Eome and Constanti- 
nople, and this separation divided its strength and made it all 
the more liable to defeat. 

Now it happened about this time, viz., the fourth cen- 
tury, that vast hordes of Huns and other tribes from the north- 
ern parts of Asia, now Siberia, swept over into Europe, driving 
the Goths and other European tribes before them and stirring 
up general confusion. The reason for this migration of the 
Huns is supposed to have been a gradual upheaval of the plains 
of Siberia, which geologists tell us actually occurred, thereby 

causing the rivers to run dry, and forcing the 
Rome^ ° Huns to movc westward with their herds and 

flocks in search of better pastures. A large num- 
ber of the Goths were forced over the Danube and settled within 
the boundaries of the Eoman Empire. They had their own king. 



CONFUSION AND IGNORANCE. 29 

and this led to a conflict with Rome, the result of which was that 
Alaric, king of the Goths, in 410 penetrated into Italy and 
marched, despite all oppositions, to the very gates of the Eternal 
City. It had been over six hundred years since Rome had felt 
the presence of a foreign enemy at her door, and that was Han- 
nibal, the Carthaginian. Alaric laid siege, captured and sacked 
the city. His successor made inroads into what is now France 
and Spain, and set up a Gothic kingdom there, while other 
tribes made similar incursions into Greece, and at the same time, 
too, still other Teutonic tribes, the Angles and the Saxons, were 
settling in Britain and laying the foundation for an Anglo-Saxon 
civilization. Later the Saracens conquered the eastern and 
African provinces of Rome and established themselves in Spain, 
where they remained for several centuries. 

These great waves of migration which passed over Europe 
destroyed for a time the old civilization and the old commerce. 
All was chaos and disorder, and the night of ignorance and 
superstition prevailed. The semi-barbarous immigrants were 
content with the simplest necessaries and the products of the 
soil. There was no demand for foreign wares or 

Confusion and j.ij.*ii?i i j.i"r> it 

Ignorance costly articlcs ot luxury such as the Roman world 

had used. The active powers of man were devoted 
to war, strife and destruction rather than the arts of peace. 
The hordes of barbarians overturned and almost annihilated 
every monument of science and art which then existed. The 
progress of literature was arrested, and so great was the general 
ignorance which prevailed that persons of the most distinguished 
rank could neither read nor write. Many charters granted by 
kings and others in high authority during this period have been 
preserved, to which it appears they were unable to subscribe their 
names, and then originated the custom for those who could not 
write to make the sign of the cross — a custom held to the present 
time, but seldom used in this enlightened day. 

It was impossible in the four or five centuries after the fall 



30 HISTORY OF COMMERCE. 

of Eome to carry on agriculture or other industries with any 
degree of success. The bare necessities were the sole aim of 
a great majority of the people. Internal trade was hardly 
more successful than agriculture^, and for the same reason. For 
several centuries there is no trace of any important manufact- 
ures except of course those domestic arts of weav- 
Comm^rce ^^S ^^^ Spinning^, which are absolutely necessary 

for providing clothes^ and which can be practiced 
by separate individuals in every village or household. Eich 
men^ indeed;, used to keep artisans in their households as 
servants; but this only shows that there were no recognized 
seats of manufacture from which they could easily procure 
what they wanted. Even kings in the ninth century had their 
clothes made by the women upon their farms. No doubt the 
villages had their smiths and weavers^, but these occupations 
belonged to a few isolated individuals^, and had not yet developed 
to any considerable branch of industry. Trade between various 
localities was very limited, for the general insecurity of the 
times made mercantile traffic highly dangerous. The want of 
means of communication and transportation prevented men from 
easily moving about to supply one another's wants, and at the 
same time made it difficult for them to ascertain what others' 
wants were. Kobbery and violence were frequent, and robbery 
by extortionate tolls still more so. The ordinary knight of 
those times was nothing more nor less than a bandit, perhaps 
not always as openly criminal as a highwayman, but very often 
employing the same methods. Since but few could read or 
write, the gates to the temple of knowledge were shut to the 
great body of the people, and they did not even surmise that 
they had any right to explore its treasures. Few books were 
written, and there are few inventions, useful or ornamental to 
society, of which this long period of nearly five centuries can 
boast. 

About the year 800, Karl the Great, otherwise known in 



CHARLEMAGNE. 31 

history as Charlemagne^ was made king of the Franks, and under 
his wise and vigorous rule learning, industry and commerce 

revived; towns and cities sprang up and manu- 
A D ^76^-^1! f actures increased, thus laying the foundation for 

the revival of internal and foreign commerce which 
was destined to set in about two centuries later. Charlemagne 
gave every freeman a share in the making of the laws, and 
improved the administration of justice. He fostered education 
by establishing schools and having the works of the ancient 
Roman writers transcribed. Unfortunately his successors were 
weak and inefficient, and his death was followed by a period 
of great confusion, during which Europe was severely harassed 
on the south by the Arabs, on the east by the Slavs and on the 
north by the Normans. 

Passing over a period of perhaps two centuries after the 
reign of Charlemagne, in which there were some occasional 
indications of the dawn of a brighter era, the inhabitants of 
Revival of Europc finally began, about the eleventh century, 

Learning and to experience a change auspicious of better times, 
ommerce rpj^^ ^^^ ^^ making paper in the manner now be- 

come universal was invented, and greatly increased the number 
of manuscripts and the general diffusion of learning. This, fol- 
lowed by the discovery of the art of printing, brought the price 
of books within the reach of those of moderate means. Then 
came the discovery of the mariner's compass, making it possible 
to extend navigation which had hitherto been confined to the 
coast and the Mediterranean Sea, over the ocean, leading to new 
and rich discoveries, and preparing the way for the commerce of 
the future. The Feudal svstem* had been established after the 



*The Feudal system was a combination of Roman and German laws and 
customs involving the tenure or ownership of land and military service to 
the lords or the king. After the conquest of the Roman provinces in France 
and Germany the land was generally divided by the conquerors into three 
portions: the king took one; another he divided among his generals and 
soldiers under the condition of military service; the third was left to the 



33 HISTORY OF COMMEKCIX 

reign of Charlemagne^ and this favored the growth of towns and 
consequently an increase in industry and commerce by the sta- 
bility which it gave to property and society in general. Trade 
guilds and craft guilds were organized, suggesting the idea of 
mutual help and co-operation. Trade guilds embodied the idea 
of our modern chambers of commerce^ and exerted considerable 
influence upon the government of the town. Craft guilds aimed 
to secure good handiwork on the part of members^, to regulate 
the number of apprentices and to provide a common fund in case 
of sickness, very much after the plan of labor unions in our day. 
While the introduction of the Feudal system was an aid to com- 
merce bv settlino' societv into a more stable and organized form, 
it finally became a hinderanco on account of the restrictions which 
it imposed upon both property and persons. The service exacted 
Effect of ^^ vassals often interfered with their employment 

Feudalism on by Calling thcui away from agriculture or other 
ommerce occupatious at tiuics whcu they were needed. The 

lords levied heavy assessments and fines upon those who were 
dependent upon them for every attempted change of occupation, 
so that those who desired to give up agriculture and become 
artisans or traders were hampered in their efforts. Jealousies 
and rivalries between the lords of different territories caused 
taxes to be laid upon the commerce between one domain and 



original inhnbltants npon tho payment of n tax. Rut for tho purpose of 
binding certain of his subjects more closely to the throne, the king granted 
out a part of his own land to them for life. This was called a fief; the 
giver was the liege lord, and the receiver was called a vassal. In the same 
way. those who had acquired large life estates as fiefs, sub-let to those less 
fortunate, portions of their estates and thus had vassals of their own. 
Bishops gave fiefs to knights for services in defending convents, and thus 
society was bound together by a system of service and obligations for 
mutual protection and defense. Gradually the more powerful oppressed 
those under them until the class which cultivated the soil became hereditary 
serfs attached to the land, and in reality slaves. The Feudal system, while 
afl'ording the benefits of protection to property, was a great hlnderance to 
freedom of both person and property, since under It land could not be 
conveyed, nor serfs transferred readily. 



VENICE. 38 

another, and thus the system eventually proved to be restrictive 
and injurious to the development of trade and commerce. 

About the twelfth century a number of Italian cities came 
into prominence on account of the trade and manufactures which 
they had built up. Among these Venice, situated on a group 
of sandy and barren islands in the Adriatic Sea, whither its in- 
habitants had been driven by the armies of Attila, was the most 
important. The wealth of Venice was originally due 
veniceT^^^ ° to two articles of commerce, viz., salt and fish, these 
being the only products obtainable on account of 
the location of the city. The Venetians built up a large trade 
with mainland cities, and eventually embarked in the carrying 
trade. Their ships went up and down the coast, as far east as 
Greece and west to Spain. Salt and fish were exchanged with 
other cities for oil, wine, lumber and metals. Extending her 
commerce, Venice brought the products of Egypt and the East 
to her wharves, and the city soon became the emporium of 
southern Europe. Her ships now touched every shore and part 
of the then civilized world, and her commerce included every 
article of value. To protect her ships from robbers and pirates 
she built an extensive navy, and each fleet of ships was convoyed 
by a man of war. Her merchant squadrons numbered in all over 
3,000 ships, and made regular sailings. Besides her maritime 
commerce, Venice built up a large overland trade with Germany 
and central European points. 

By her extensive trade and navigation Venice raised herself 
to a degree of prosperity and magnificence which recalls the 
memory of the most flourishing period of ancient Greece. She 
established a republican form of government, 
Twc^lT^^ built gorgeous palaces (that of the Doge or Gov- 
ernor), magnificent churches (the Cathedral of 
St. Mark), and splendid squares (that of St. Mark), and made 
the city the wonder of the world. The Venetians supplied salt 
and fish to nearly the whole world, a trade in which they had 



34 HISTORY OF COMMERCE. 

a complete monopoly; and in every instance where a treaty was 
made with a foreign power a clause was introduced reserving 
to Venice the exclusive privilege of supplying these commodi- 
ties. Besides its enormous trade^, Venice engaged extensively in 
manufacturing, and exported its wares to all parts of Europe and 
Asia. Silk was one of the most valuable products of its artisans, 
the art of weaving this into beautiful tissues having been learned 
from the Persians. Another product was glass^ which they made 
from the sand of their own islands in such a high degree of 
skill that Venetian glass became celebrated everywhere for its 
clearness and beauty. This art the Venetians had learned from 
the Arabs^ and^ with the decorative art and skill which they 
possessed, were able to produce glass work of rare beauty. They 
also made woolen and cotton cloths from the raw products which 
they imported from Spain, Greece and Egypt, and carried on 
extensive manufactures in brass and iron, so that their shields 
and armors were the most beautiful and excellent in Europe. 
The Venetians kept constantly developing their shipping facili- 
ties. They made extensive improvements in the methods of 
marine and naval construction, established arsenals and eventu- 
ally acquired naval supremacy. 

But this energetic and progressive people seemed possessed of 
a natural faculty for finance and commerce. They were natural 
born traders and financiers. A great feature of the wealth of 
the city was its banking facilities. The bank of Venice, estab- 
lished in 1171, was the first regularly organized bank in the 

world, although it did not develop all of the func- 
venice^" ^ tious of a modcm bank until long after. The 

republic, being hard pressed for money, on three 
different occasions was obliged to levy forced contributions upon 
the citizens, and in return gave them perpetual annuities at 
certain rates per annum on the amount loaned. The offices for 
the payment of these annuities were consolidated and became 
the Bank of Venice. The annuities or interest on the govern- 



VENICE. 35 

ment loans being punctually paid^ the amount of the loan as 
registered upon the books of the bank came to be considered as 
a species of property and passed from one person to another by 
devise^, descent and assignment. Debts were frequently paid 
in this manner;, and by allowing the mutual cancellation of 
debts by the transfer of credits on the books of the bank, the use 
of money was at first saved to a considerable extent, and later 
certificates;, payable to bearer;, the equivalent of bank bills, v/ere 
used to obviate the necessity for entries upon the books. 

The "Kialto'^ was their great commercial exchange where 
the merchants met and did their trading. The transactions 
of this exchange had a wider influence on the commerce of the 
world at that time than any other market. The Venetians were 
the first to reduce finance to a science. They were the origin- 
ators of the system of double entry book-keeping, 
Jnd Learntng^ wMch WO usc with modifications to this day. They 
are credited by some authorities with having a 
knowledge of printing prior to Coster and Gutenberg (A.D.1440), 
having (as has been asserted) received it from the Chinese, by 
whom the art had been practiced for two thousand years. We know 
that Venice took the lead of all Europe in the manufacture of 
books and that newspapers were first issued by them, thus indi- 
cating that Italy stood in the van of progress and enlightenment 
at the close of the fifteenth century. 



CHAPTER IV. 

MEDIEVAL COMMERCE— Continued. 

DECLINE OF VENICE; COMMERCE OF GENOA, FLORENCE AND 
PISA— EFFECT OF DISCOVERY OF AMERICA. 

Besides Venice there were several Italian cities which 
achieved great renown in commerce, art and learning during 
the middle ages. These were Genoa, Florence, Pisa and Milan. 

They followed Venetian methods to a consider- 
ofvenlce^^ able degree and seemed possessed in a measure of 

the Venetian character for commerce and finance. 
Eivalries sprang up and wars between Venice and these cities 
were frequent and bitter. Genoa was an inveterate enemy of 
Venice and their conflicts at times remind one of the Punic Wars 
waged between Eome and Carthage. Venice may be said to have 
reached the period of its greatest wealth and power about the 
fourteenth century. Then, by gradual steps, the original, demo- 
cratic constitution of the Eepublic was changed into an oppres- 
sive, hereditary aristocracy and the power of the state vested in a 
few noble families. Venice was governed with dictatorial power; 
a state Inquisition with subterranean dungeons and racks was 
established, and every act of the people was watched, every word 
listened to. Along with this, luxury and wealth had brought 
corruption in office, and the moral tone of the people declined, 
thus sowing the seeds of national weakness and decay. Two 
other circumstances contributed directly and powerfully to the 
decline of Venice. The first of these was the continued successes 
of the Turks in the East, by which Venice was robbed of the 
commercial advantages which she had so long and profitably 
enjoyed, together with the loss of the island of Crete, one of her 
richest colonies; and the other was the discovery of the sea route 

36 



GENOA. 37 

to India by way of the Cape of Good Hope. These diverted a 
considerable portion of the commerce of Western Europe from its 
former channels through the Mediterranean^ and thus reduced 
the commerce of Venice accordingly. 

Genoa was the proud rival of Venice. Founded by the 
Romans before the Christian era^ Genoa flourished as a com- 
mercial emporium from the beginning. It had a spacious har- 
bor, from which it sent timber, wool and earthenware to other 
parts of Italy in exchange for wine and oil. Aiier the fall of 
the Roman Empire, Genoa set up a republican form of govern- 
ment and in the tenth century built a navy with 
Genoa^^^^° which it began to reach out for a share of the 
Mediterranean commerce. It established a pros- 
perous trade with Sicily, the north coast of Africa, and the 
southern coast of France. The islands of Corsica and Capraja 
became Genoese colonies, and an overland trade was established 
with Flanders and Germany. Like the other Italian cities 
Genoa profited by the Crusades, for in return for the help ren- 
dered by it to the crusaders the republic was granted a strip of 
Phoenician territory and various privileges of trade in Syria, 
which gave it a valuable portion of eastern trade, and enabled 
the republic to eventually get a firm foothold in Greece and Asia 
Minor. With a flourishing commerce, the harbor of Genoa was 
constantly filled with a forest of masts; her commercial ex- 
changes were only second to the Rialto of Venice in size and 
importance and her marble palaces gave evidence of her increas- 
ing w^ealth. The growth of Genoese commerce and influence 
aroused the jealousies of the other republics of northern Italy, 
especially Venice and Pisa, and they sought by every means in 
their power to limit her ambition. From the eleventh to the 
end of the fourteenth century Genoa was almost constantly at 
war with Venice, thus wasting the possibilities of both republics 
in domestic broils and interminable rivalries. They first came 
into serious conflict when the merchants of Genoa attempted 



38 HISTORY OP COMMERCE. 

to obtain a share of the trade of the Grecian Archipelago and 
Black Sea Ports. Finally in the latter part of the thirteenth 
century the Genoese triumphed over the Venetian fleet, and in 
the treaty of peace which followed Venice surrendered to Genoa 
her commerce in the Black Sea, and her colonies and agencies 
which had been planted there. 

Genoa possessed but few industries of her own, her commerce 
consisting chiefly of the exchange of the productions of the 
East with those of the West, taking chiefly cloths and pottery 

from France and linen and leather from Germany 
Industries ^^ ^^^ ^^^^> ^^^ bringing from the Black Sea and 

other eastern ports fine cloths, spices, silks and 
ivory. However, near the close of the twelfth century, the 
^enoese had plundered two Moorish cities in Spain, from which 
they derived the art of silk manufacture, and so successful did 
the industry prove, that silk became a staple manufacture 
among all the Lombard republics, and the cultivation of mul- 
berry trees was enforced by their laws. Woolen goods were also 
manufactured by the Genoese to a considerable extent. 

Usury, or lending money on interest, was regarded as a crime 
by the theologians of the middle ages. This strange prejudice 
against one of the most useful and legitimate branches of busi- 
Genoese ^^^^ Continued for hundreds of years, and although 

Finance and finally eradicated, had its effect upon legislation 
^^^ in modern times. The trade in money, and indeed 

a large part of the inland trade in general of the Italian cities, 
had fallen into the hands of the Jews, who were noted for 
their usury. They were not molested by the clergy, being re- 
garded as infidels, and they had no conscientious scruples them- 
selves against usury, since the Jewish law permitted them to 
charge usury against Gentiles.* The rates of interest were ten 
to fifteen per cent, per annum. At Verona in 1228 the rate 

♦Unto a stranger thou mayest lend upon usury. But unto thy brother 
thou Shalt not lend upon usury. Deut. XXIII. 



DECLINE OF GENOA. 39 

was fixed by law at twelve and one-half per cent; at Modena 
in 1370 it seems to have been as high as twenty per cent.^ and 
in France and England still more oppressive. The republic of 
Genoa^ towards the end of the fourteenth century when it had 
grown wealthy, paid from seven to ten per cent, on its outstanding 
obligations. The high rate of interest generally during this 
period was owing partly to risks, business being hazardous on 
account of inefficient laws, and also to the fact that profits in 
business were very large. The Venetian merchants are said to 
have cleared never less than forty per cent, profit on their com- 
mercial transactions, and since Genoa and the other Italian cities 
exercised monopolies we may safely assume that their profits were 
enormous. In the last part of the thirteenth century the bank- 
ers in the Italian cities and those of the south of France took up 
the business of remitting money by means of bills of exchange, 
and charging interest on loans. A distinction was then made 
between moderate and exorbitant interest, and the utility of 
negotiable bills of exchange was so great that gradually the 
prejudice against usury (interest) wore away, and the Lombard 
usurers established themselves in every country. 

Having finally been robbed of its Black Sea commerce by the 
Turks, and later defeated by the superior power of its old enemy 
the Venetians in other parts of the Mediterranean, the Genoese 

turned their attention in another direction, hoping 
Am&ci^^^ thereby to retrieve their fortunes. There were 

among Genoese sailors some who were acquainted 
with the globular form of the earth, having acquired this knowl- 
edge from the Mohammedan astronomers, and these men orig- 
inated the attempt to reach India by sailing to the west. Great- 
est and best among them, seeking the welfare of his city and 
hoping that the riches of India might thus be secured, was 
Christopher Columbus, the son of a wool comber. He had 
studied the ordinary branches of arithmetic, drawing and paint- 
ing, and is said to have acquired a singularly beautiful hand- 



40 HISTORY OF COMMERCE. 

writing. After attending the university for a short time, he 
went to sea when fourteen years of age, and for many years was 
engaged in the Syrian trade and in that of other ports, later turn- 
ing his attention to the construction of charts for sale, and the 
deeper study of geography and navigation. 

The result of Columbus^ discovery was to draw the attention 
of Europe to the westward and dispel the mystery of the open 
sea. Migration set in towards the western coast of Europe, and 
Decline of ^^^ ^^^ routc to India diverted commerce in other 

Genoese channcls. Gcuoa became subject to Milan, and 

Commerce although it again grew prosperous, it never re- 

gained its former commercial importance. 

Only second in importance to the republics of Venice and 
Genoa was the city of Pisa, situated in a plain between the Appe- 
nines on the east and the Tuscan Sea on the west. The founding 
of the city, like that of Genoa, dates back to the Eoman Empire, 
and like all other Italian cities, Pisa suffered from the barbarian 
conquest; but like them, too, she secured her independence, set 
up a republican form of government, and rapidly sprang forward 
to a foremost place among the maritime states of Italy. In the 
eleventh century Pisa acquired the islands of Sardinia, Corsica 
and Elba, besides adding many important districts along the 
coast to its territory, with all of which it carried on a prosperous 
commerce. The crusades poured fresh wealth into the lap of 
Pisa, and in return for its help in transporting the armament to 
Palestine, Pisa was given extensive privileges and became one 
of the channels through which the produce of the east flowed 
in upon the ruder nations of western Europe. Pisa reached the 
zenith of its power at about the end of the eleventh century. Its 
prosperity was marked by public, edifices which stand as monu- 
ments to Pisan greatness to this day. Pisa was the first Italian 
city which took pride in architecture, and its leaning tower and 
cathedral are examples of skill and beauty. It was in this 
cathedral that the illustrious philosopher, Galileo, watched the 



FLORENCE. 41 

swinging of the chandelier, and observing that its vibrations, 
large and small, were made in equal times, "left the house of 
God, his prayers unsaid, but the pendulum clock invented/^ 

The Pisans are also credited with being the first 
andLearnhig ^^ codifj and promulgate a system of maritime 

law suited to the extensive Mediterranean com- 
merce, defining the rights of neutral and belligerent vessels, 
and thus laying the foundation for a portion, at least, of the in- 
ternational law of modern times. In the course of time Pisa 
succumbed to the wars and competition of rival cities. Genoa 
was its most bitter enemy, and in one fatal battle off the Island of 
Meloria, in 1284, the entire Pisan navy was destroyed. Torn by 
dissensions, and stripped of her commerce and colonies, Pisa 
was finally sold in 1406 to Florence for 400,000 florins, and be- 
came a port for the commerce of that city. 

Situated above Pisa, on the Eiver Arno, and being without 
shipping facilities, the success and commercial importance of 
Florence were achieved in the direction of manufacturing, 

finance, literature and art, rather than maritime 
Florence trade. Her weavers and goldsmiths were famed all 

over Europe for their fine products, and her silk 
and woolen cloths and articles of jewelry were exported to all 
the principal cities of the western world. Like the other Italian 
cities, Florence was vexed and retarded by internal revolutions 
and external strifes. In the latter part of the thirteenth century 
a republican form of government was established, which con- 
tinued in modified forms for several hundred years. Notwith- 
standing the wars and strifes in which Florence engaged in 
common with her sister republics, her growth in wealth and 
population continued without abatement, until at one time she 
was not only the capital of Tuscany, but the chief city of all 
Italy. 

In the fifteenth century the great family of Medici, Floren- 
tine bankers, succeeded in obtaining control of the government 



42 HISTORY OF COMMERCE. 

of Florence and changing it from a republic to an hereditary 
aristocracy^ but while this was a blow to popular -government^ 
yet the remarkable character of the Medicis and their vigorous 
and enlightened rule were by no means discouraging to the com- 
mercial and artistic progress of the city. Indeed it was under the 
Florence under Mcdicis that Florence achieved its greatest glory, 
the House of This Celebrated family of bankers was founded 
by Giovanni de Medici, a merchant and after- 
wards a banker, about the middle of the fifteenth century, but 
the greatest of the family were Cosmos and Lorenzo, sons of 
Giovanni. The latter, surnamed the ^^^Magnificent,'^ so gov- 
erned Florence that all Europe was filled with his fame. Eichest 
of Italians that he was, he lavished his wealth on palaces, 
churches, hospitals and libraries. He made Florence the seat 
of every art and science and a seminary for all Europe. His 
court was ornamented with artists, poets and writers. Learned 
men from Greece and other portions of the East, who were 
flying from the sword of the Turks, taught the Greek language 
and literature in Florence; and under his rule, sculpture, paint- 
ing and music began to unfold their choicest blossoms. Florence 
was called "The Athens of the West/^ and to this period of its 
history we are indebted for the names of Michael Angelo the 
sculptor, Dante the poet, Machiavelli the statesman, and Amerigo 
Vespucci, the discoverer of our western hemisphere. 

The banking houses of Florence were the largest and wealth- 
iest of Europe, and through them nearly every great loan made 
by the kings of central and western Europe to carry on their 
wars was negotiated. The houses of Bardi, Pitti, 
Bankers"^ Mcdici and Peruzzi were the leaders in the finan- 

cial world during the thirteenth and fourteenth 
centuries, and are said to have been "The pillars which sustained 
a great part of the commerce of Christendom.'^ The customs of 
England were farmed to the Bardi in 1329 as a security for 
loans, and they probably had excellent bargains. In 1345 the 



MILAN. 43 

Bardi and the Periizzi failed. Edward III of England owed the 

Bardi 900,000 gold florins and the Peruzzi 600,000 florins, which 

he was unable to pay on account of his wars with France. The 

king of Sicily also owed each of these houses 100,000 florins 

[ which he w^as unable to pay. On the other hand the Bardi had 

I deposits belonging to citizens and merchants to the amount of 

550,000 florins, and the Peruzzi were carrying deposits to the 

[amount of 350,000 florins in gold. Unable to collect from the 

kings the bankers were equally unable to pay their depositors. 

The failure of these two banks caused great distress to the city 

and injury to its commercial interests. 

Milan, the ancient capital of Cisalpine Gaul, and the favorite 
residence of the Gothic kings, is the fifth of the Italian cities 
which achieved commercial distinction in the middle ages. 
Without a seaport, she acquired her greatness by 
Miian^^^^^ ° agriculture and manufacture rather than through 
maritime commerce. Situated in a beautiful plain 
of fertile land through which coursed a tributary of the Eiver Po, 
the Milanese early turned their attention to agriculture and the 
industrial arts. The invasion of the Huns in 899 caused the 
Milanese to wall in and fortify the city, and thus later it became 
independent of the feudal barons of northern Italy, and set up 
its own republican form of government. After the peace of 
Constance in 1184, Milan grew apace both in population and 
material wealth. Manufactures flourished extensively, the lead- 
ing industry being the making of armor. 

During her struggles with the Emperor Frederick of Ger- 
many (Frederick Eed-Beard) for the preservation of Milanese 
independence, a powerful fraternity called the Umiliati was 
formed, which later became instrumental in developing the wool 
trade and subsequently gave the first impetus to the production 
of silk. From this period also date the irrigation works which 
render the plain about Milan a productive garden to this day. 
In the thirteenth centurv Milan was o^reatlv retarded in her de- 



MILAN. 45 

velopment by the turmoils of the Guelphs and the Ghibelines, 
the partisans of first one and then the other obtaining control 

of the government. In the fourteenth century the 
Control^ ^" great family of Giovanni Galeazzo, one of the 

Visconti, became sole lord of Milan^ and inaug- 
urated a remarkable career, resembling in many respects those 
of the Medicis in Florence. It was under him that the Cathedral 
of Milan was begun in 1386. It is built of marble from the 
quarries which Visconti gave for the purpose. The work upon 
this wonderful building was continued through several cen- 
turies, and finally finished under Napoleon in 1805. After many 
vicissitudes and strifes, Milan, in 1500, passed under control 
alternately of France and Spain, and finally became a part of the 
Kingdom of Italy. Owing to its agricultural and manufacturing 
interests, it suffered less than the maritime cities of Italy by the 
discovery of the Cape route to India. 

Gradually the seat of commercial empire shifted from the 
Italian cities to other parts of Europe, north and west. The 
inventions and discoveries incident to the general intellectual 
Change of awakening which set in about the fifteenth cen- 

commerciai tury, the iuvcntion of the art of printing, the 

enters mariner's compass, 'the use of gunpowder, im- 

provements in shipbuilding and in methods of finance, com- 
merce, and law, worked changes in the established channels of 
trade and developed new centers of commerce. We are now to 
leave the Mediterranean Sea, upon whose shores was grouped 
the ancient and medieval commerce and civilization of the 
world, and betake ourselves to other parts of Europe. 



CHAPTEE V. 

MODERN COMMERCE. 

THE CAPE ROUTE TO INDIA; PORTUGUESE COMMERCE; SPAIN'S 

VAST POSSESSIONS; EXPULSION OF THE MOORS; 

DUTCH COMMERCE. 

Allusion has been made to the discovery of America and of 
the Cape Eoute to India^, two events which occurred at the 
dawn of the modern era of history^ and were destined to exer- 
cise a momentous influence upon the commerce of the world as 
well as the progress and welfare of the human race. Near the 
close of the fifteenth century the map of the world consisted 

of central and southern Europe, the north coast of 
New^E^ra^ Africa, and Asia as far as Persia. India and the 

far East was a land of mystery, while the West 
was a waste of waters enveloped in gloom and superstition. 
With the aid of the mariner^s compass bold navigators had 
gradually ventured farther from land, and in 1431 a ship captain 
from Bruges had sighted the Azore Islands. The Atlantic was 
bein^ gradually explored. 

The Portuguese were at this time an enterprising and grow- 
ing commercial and maritime people and their capital, Lisbon, 
owing to its frontier position, had become an important distribut- 
ing point for products on the western coast of Europe. In 149 G 
a Portuguese navigator, Vasco de Gama, steering his course 
southward along the shores of Africa, finally doubled the Cape 

of Good Hope and reached India, to return with 
Route^o^india fabulous accouuts of its wealth and mysteries. 

The importance of this discovery was enhanced by 
the fact that at tliis time the Turks, floors and Algerians were 
swarming around the shores of the Mediterranean Sea, capturing 

46 



THE PORTUGUESE. 47 

ships and caravans and destroying commerce^ so that the old 
routes to India overland by caravans were no longer safe. 
Venice, owing to the decline of her commerce, was no longer able 
to successfully resist these inroads and attacks, and hence the new 
route afforded an effectual escape from this serious difficulty. 
Besides, an all sea route avoided the labor and damage to goods 
incident to handling them in changing from ship to camels or 
the reverse, and furthermore, by this sea route the traders were 
enabled to go to India and see the country for themselves, exam- 
ine its products and judge of its resources and wants, instead of 
trading, as hitherto, chiefly through Arabian merchants. Thus 
we see the importance of the discovery of the new route, and its 
effect in diverting European commerce from Mediterranean ports, 
to which it only returned after the completion of the Suez Canal 
in our own time. 

The Portuguese established colonies on the coast of Malabar 
and the island of Ceylon. After some conflicts with the natives 
on account of outrages inflicted upon them, aided by the Moham- 
Portuguese uicdau merchants and even by the Venetians who 

Trade in the sought to cxpcl their rival from this rich field of 
^^^^ commerce, the Portuguese succeeded in firmly es- 

tablishing an extensive trade with India. By 1515 they had 
captured a number of cities along the coast, subjugated the 
spice bearing islands, and really controlled the commerce of the 
coast of Asia extending from the Persian Gulf to the islands of 
Japan. Lisbon became the seat of this extensive commerce and 
the distributing point for the products of India. 

Early in the spring of each year a fieet of Portuguese ships set 
sail for India, convoyed by war ships. The route lay along the 
west coast of Africa; and after doubling the Cape, the trade 
winds assisted them in an easy and direct voyage across the 
Indian Ocean to the city of Goa, on the west coast, their prin- 
cipal port. Eeturning, the route was much the same, except 
that the fleet touched at various trading stations along the coast 



48 HISTORY OF COMMERCE. 

of Africa, thence at St. Helena, the Cape Verde and Azore 
islands, and home. The voyage usually required about eighteen 
months for its completion, and owing to inferior ships and the 
imperfect knowledge of navigation which prevailed at that time, 
frequently resulted in the loss of a portion of the fleet. But the 
profits of this commerce were very large and the field of adven- 
ture enticing. 

From India the Portuguese ships brought to Europe in 
greater abundance those products frequently mentioned hereto- 
fore as having been imported by the caravans of Arabia and 
Persia. From the west coast of Africa and the islands they 
brought ivory, gold, gum, wine, cotton, and slaves. To Lisbon 
came the ships of Britain, Flanders, and the Hansa towns of the 
North and Baltic Sea ports, to receive their cargoes for home 
consumption, and for a time Lisbon promised to eclipse the 
wealth and commercial greatness of even Venice or Genoa. 
Having succeeded so well in the East, the Portuguese turned 
Portuguese their faccs westward and discovered Brazil with its 

Success and vast and Varied wealth. But the avarice and greed 
of the Portuguese, their monopolistic spirit, their 
oppression of other merchants who were their best customers, 
and their generally narrow and short-sighted policy, together 
with their neglect to provide for the defense of their colonies 
and trade possessions, soon brought about their downfall. By 
1580 the Portuguese commerce in the East had seriously de- 
clined, and in that year the crown was united w^ith that of Spain 
under Phillip 11. This union of the two countries continued 
until 1640, when they again separated, but since that date 
Portugal has been too weak and impoverished to achieve any 
distinction in commerce. 

The Spaniards of the sixteenth century were great explorers 
and discoverers, but their conquests were usually inspired by an 
inordinate thirst for gold and not for commercial advantages. 
They were singularly lacking in the commercial faculty, and 



SPAIN. 49 

despised the industries. They not only neglected and failed to 
build up the waning Portuguese commerce in the East, but soon 
became involved in a war with the Dutch, which 
Commerce ^^^ ^^^ means not only of destroying a consider- 

able portion of their own and the Portuguese 
fleet, but also of driving the Dutch into the commerce of India 
which the Portuguese had once so jealously kept to themselves. 

By means of discoveries in the new world, under the patron- 
age of Ferdinand and Isabella, by Columbus, Cabot and son and 
Ponce de Leon, and the inhuman conquests of Mexico by Cortez, 
of Peru by Pizarro, and of Chili by Almagro, all of which are 
embraced within a period of fifty years in the last part of the 
Extent of fifteenth and early part of the sixteenth centuries, 

Spanish nearly the whole of the Western Hemisphere came 

ommions under the control of Spain, and so remained for 

almost a hundred years. Besides crushing out in Mexico and 
Peru a civilization which might have instructed Spain, and 
practicing the most atrocious barbarities upon millions of inno- 
cent human beings for greed of gold, and in the name of religion, 
Spain did almost nothing towards developing the resources of 
this new world. 

Not only did Spain possess a monopoly of the Western Hemi- 
sphere at the beginning of the sixteenth century, but also con- 
trolled a large portion of Europe, including what is now the 
empire of Germany, the Netherlands, Burgundy, Sicily, and 
Milan, Tunis and Oran, together with the Canary and Cape 
Verde Islands in Africa, and the Philippines and other posses- 
sions in Asia. Immense in extent and of incalculable richness 
as were her dominions, yet the most fertile and promising 
regions were despised unless they immediately gave promise of 
gold or silver in large quantities to satisfy Spanish greed and 
luxury. 

Spain pursued the most selfish, narrow and short-sighted 
policy towards her colonies, seeming to regard them as proper 



50 HISTORY OP COMMERCE. 

subjects to be bled and fleeced for the enrichment of the home 
country. She farmed the revenues to local governors, who, hav- 
s anish ^^S P^^^ "^^^6 required sum to the crown, in turn 

Colonial enacted an enormous increase by oppressive taxes 

^°^^^^ on the people levied in every conceivable form. 

Few harbors were established, manufacturing was not only dis- 
couraged but actually forbidden, as was also the raising of all 
European products. Natives and Colonists were forced by every 
device to purchase from the mother country all manufactured 
articles, and her colonies were regarded as markets for the 
goods of the mother country. The inhuman treatment of the 
natives was in accord with the general spirit of Spanish colonial 
policy. In 1532 the silver mines of Zacatecas, Mexico, were 
opened, and about the same time, extensive mines in Peru. The 
native Indians were employed to work these mines, and were so 
cruelly treated that nearly all of them died, so that slaves from 
Africa had to be exported to fill their places. With appalling 
atrocity the Spaniards proceeded to confiscate the lands and 
goods of the natives and inflict upon them every form of cruelty 
and oppression. 

The same year in which Columbus discovered America wit- 
nessed one of the most melancholy events in Spanish history, 
and one which seriously affected the prosperity of the country — 
the expulsion of the Moors. When the Moorish kingdom of 
Grenada, after a war of ten years, fell before the soldiers of 
Ferdinand and Isabella, the Mohammedans were allowed no 
alternative but to leave their country or embrace Christianity. 
Many chose the former course, while others, with inward repug- 
nance, yielded obedience, but were driven by the cruelty of the 
inquisition to repeated rebellion, by which their 
uTe^Molrs^* couditiou was always rendered worse than before. 
They were flnally commanded to renounce even 
their language, dress and customs, and 800,000 Moors, men and 
women, old men and children, left the land of their birth, their 



SPAIN. 51 

blooming fields and the houses they had built^ and where their 
ancestors had lived for eight hundred years. The flourishing 
plains of the south of Spain soon became a desert^, agriculture 
decayed and trade stagnated; prosperous villages were reduced to 
ruins^ towns once animated by commerce became depopulated, 
poverty, dirt and sloth took possession of the once rich and 
happy country, the departed splendor of which is still attested by 
such magnificent ruins as the Alhambra. 

A fate similar to that of the Moors was visited upon the 
Jews*, while priests and courtiers divided the treasures of the 
banished. The Jews were the most diligent and skillful work- 
men in Spain, and their banishment, together with that of the 
Moors, left the country impoverished in every branch of trade 
and industry. The Spaniards were unable to supply the articles 

which the silver of Peru would purchase, and 
Industries ^ hcncc the Spanish gold and silver which flowed in 

from their conquests and discoveries went to the 
markets of the Netherlands and England, there to be exchanged 
for linen and woolen cloth, manufactured metals, English woolen 
fabrics, and timber for ship-building. English, Dutch and Ger- 
man merchants brought the articles which Spain needed, and 
carried home in return gold, silver, pearls and wine. 

Now observe how this fortunate condition of affairs, this 
profitable trade with England and other northern countries, 
was interfered with and broken up by Spain herself. During the 
sixteenth century religious zeal and fanaticism w^ere very active 
in Spain, and the Inquisition spread terror to all heretics. 
Philip II conceived an ambition to invade England, dethrone 
Elizabeth, and restore the Catholic religion which had been 
abolished by Elizabeth^s father and predecessor, Henry VIII. 
For this purpose, in 1588, he fitted out the greatest fleet of the 
century, and gave it the boastful name of the ^Invincible Ar- 

*In the spring of 1492 the Jews, to the number of one hundred and 
sixty thousand, according to Prescott, were expelled from the kingdom. 



52 HISTORY OF COMMERCE. 

mada/^ With this he attacked the English squadron off the 
south coast of England^, resulting in the loss by destruction and 
capture of the entire Spanish fleet. This conflict destroyed the 
At War with commerce between Spain and England^ and the 
the English latter began to make preparations at once to 

an utch embark in American commerce and colonization 

on her own account, with the result that the first permanent 
English colony was planted in Virginia nineteen years later. 
From that date Spanish interests in the western world began 
to decline. Her colonies revolted early in the nineteenth cen- 
tury and several of them acquired their independence.* Cuba 
in 1868 attempted to throw off the yoke of Spanish oppression, 
but failed. In 1895 another attempt was made, resulting in a 
bloody war of nearly five years, during which the American 
warship, Maine, was blown up in Havana harbor. This overt 
act gave the United States the desired opportunity to assist the 
Cubans, and led to the Spanish- American war which freed Cuba 
in 1899, and resulted in Porto Eico and the Philippine Islands 
being ceded to the United States. Now only the Canary Islands 
and two small provinces of doubtful value on the west coast of 
Africa remain as the residue of Spain's vast possessions. 

Equally unnecessary and unwise was the breach between 
Spain and the Dutch. The l^etherlands were Spanish territory, 
and the Dutch were Spain's best customers. Their ships were 
in the habit of going to Lisbon for their cargoes of eastern 
goods, but the fanatical Philip II undertook to force the Eoman 
Catholic religion upon them, and at his persecutions they re- 
volted. He then closed the port of Lisbon against their ships, 
and their alternative was to either give up their eastern trade or 
go to India for the goods themselves. They were too enterpris- 
ing to do the former, and hence was begun the commerce of 

♦Mexico became independent in 1822; Peru, 1824; Chili, 1826; Colombia, 
1820; Ecuador, 1830; Bolivia, 1825; Venezuela, 1831; Uruguay, 1825; Argen- 
tine Republic, 1810; Paraguay, 1814; Cuba, 1899; Puerto Rico and the 
Philippines wore ceded to the United States in 1899. 



THE DUTCH. 53 

the Dutch in India, while at the same time they joined their 
forces with England in the effort to destroy the Spanish fleet. 

The commercial history of Holland rivals in interest that of 
Venice^ and those indefatigable people achieved a commercial 
importance in the sixteenth and seventeenth centuries which en- 
titles them to a prominent place in history. Their lands are 
below the level of the sea^ on the northwest coast of Europe, 
and were reclaimed from the sea by building immense dykes. 
Year after year and generation after generation this sturdy and 
indomitable people fought back the sea, and the soil being but 
a sediment of mud, under their careful cultivation, became a 
fertile garden. They were a nation of agricultur- 
andCharaltlr ^^^^^ manufacturers and merchants. Abstemious 
and self-denying to a degree, they handled the 
products of the East as merchants, but denied themselves the 
use of luxuries. At the time of Philip II they had already 
become one of the richest and most prosperous provinces in 
Europe. Their thrift was unsurpassed. Their cities of Antwerp, 
Amsterdam and Rotterdam were the commercial centers of 
northern Europe. These cities had been the seat of considerable 
manufacturing during the middle ages. Woolen and linen goods 
were the chief products. The first optical instruments and the 
pendulum clock came from Holland. The art of printing 
and book-binding had been carried to a high state of perfection. 
Dutch ships had, centuries before, traded at the ports along 
the shores of the Baltic Sea and distributed the products received 
from Venetian merchants. Gradually the Dutch had built up 
extensive fisheries, until at one time the herring fisheries of 
Holland gave employment to 60,000 men. In 1614 a company 
was organized for the special purpose of engaging 
merceat°Home ^^ whalc fishiug. At the beginning of the seven- 
teenth century (1600) the carrying trade of Europe 
was practically all in the hands of the Dutch. They also pos- 
sessed a monopoly of the ship building industry, and nearly every 



54 HISTORY OF COMMERCE. 

country of Europe had its ships built in Holland. Agriculture 
and cattle raising flourished extensively at this time, and to- 
gether with its manufacturing industries placed the country in a 
most prosperous condition. 

Having broken off with Spain^ the Dutch immediately turned 
their attention toward the commerce of the East. A number of 
merchants combined to fit out ships for the long voyage, and 
the venture proving highly successful, the great Dutch East 
Dutch Com- India Company was formed in 1602, with a charter 

merce in the f rom the govcmment. This company was the pat- 
tern of all future Dutch, French and English 
companies, and had authority to take possession of newly dis- 
covered land, make war or peace with the natives or other in- 
habitants, erect forts, establish garrisons, and appoint adminis- 
trative and judicial officers. Fierce and bloody conflicts with 
the Portuguese in India and the far East ensued, but with the 
help of the natives the Dutch drove them from Malacca in 1651 
and from Ceylon in 1658. Java, Bantam, Amboina, Ternate 
and the Banda Islands were opened up to Dutch commerce, and 
even a slight footing in Japan was secured. In 1660 the Dutch 
conquered Celebes, one of the last possessions of the unfortunate 
and misgoverning Portuguese. With this extensive commerce 
flowing directly into Holland, the Dutch grew in wealth at a 
wonderful pace. Amsterdam became the Venice of the North 
and the great banking exchange for Europe. 

Having thus established a rich and successful empire in the 
East, whose gains provided the means for further expansion, the 
Dutch began to turn their attention to the Western hemisphere. 
They fitted out several exploring expeditions, and one of these, 
in charge of Hendrik Hudson, an agent of the 
l^^thrw^f'" Dutch East India Company, bent on finding a 
western passage to India, sailed into New York 
harbor in 1609 and discovered the river which bears his name. 
Five vears later the Dutch built a fort on Manhattan Island, 



THE DUTCH. 55 

which they purchased from the Indians for a sum equivalent to 
$24 in our currency, and named the settlement Xew Amsterdam. 
In 1612 the Dutch took possession of a number of the West 
India Islands and established a colony in Guiana, South America. 
Their western commerce was increasing, and anticipating that it 
might equal or surpass their trade with the East, they formed 
the West India Company, which, however, proved anything but 
successful financially. 

The colonial policy of the Dutch was of the oppressive and 
monopolistic character, similar in many respects to that of 
Portugal and Spain, and the prosperity of their colonies was 
not permanent. England came forward about the middle of the 
seventeenth century as a rival to the Dutch in foreign commerce, 
and passed a series of statutes in 1651 and 1660, called the 
Navigation Acts, aimed at Dutch commerce. These brought on 
a short but severe war with England, which resulted disastrously 
for Holland. During this conflict the English forcibly took 
possession of New Amsterdam and converted it into an English 
colony, changing the name to New York. With the progress 
of England and France the commercial power of Holland de- 
clined. The Norwegians competed with them in the fisheries, 
the Germans in the trade of central and southern Europe, and 
Holland became, and has since remained, secondary in point of 
commercial importance. 



CHAPTER VI. 

COMMERCE OF GERMANY. 

HANSEATIC LEAGUE; EFFECT OF THIRTY YEARS' WAR; REVIVAL 
OF GERMAN COMMERCE; ZOLLVEREIN; PRESENT COMMERCE. 

In order to better understand the commerce of Germany 
we must go back a little in point of time to the middle ages^ 
and glance at the civilization and commerce which had grown up 
in the north of Europe. In the time of Charlemagne (768-814) 
there were a number of important trading towns 
Hansa Towns established^, which grew into local centers of com- 
merce. These began with Bruges in Flanders and 
one or two Ehine cities in the west^, and were scattered through 
what is now Germany and Austria and along the coast of the 
Baltic Sea as far as Eussia. Many of these towns later organized 
themselves into small republics, after the manner of the Italian 
cities, for self-protection against the territorial lords, who, under 
the Feudal system, ruled and plundered the country about them. 
Then in order to protect themselves from common enemies, 
such as the predatory inroads of barbarians and Turks, and the 
pirates which infested the seas — chiefly the Northmen who 
swarmed in the North and Baltic Seas — they formed themselves 
into one grand combine, called the Hanseatic League. They 
used the power thus acquired for gaining greater security for 
their commerce. 

The commerce of Europe during the middle ages may be said 

to have been divided into two great dominions, 

ITaguT^^^'^ viz., the commercial cities of Italy in the south 

of Europe and the Hansa towns in the North. The 

connecting links between these two commercial domains were 

the highways built chiefly by the Komans, and more especially 

56 



THE HANSA. 57 

the rivers Ehine, Danube^ Elbe and other waterways. 
The centers of the Hanseatic League were Lubec on the Baltic 
Sea, and Hamburg and Bremen on the other side of the Cimbrie 
peninsula. Later they were joined by Brunswick, Dantzig, Mun- 
ster, Magdeburg and the ancient city of Cologne. The nobles 
tried to obstruct the formation of this league, which was in a great 
measure designed to withstand their exactions, but without avail, 
and in 1300 there were eighty cities in the confederation, stretch- 
ing from Belgium to the gulf of Finland. The towns were 
divided into four colleges or districts, of which Lubec, Cologne, 
Brunswick and Dantzig were the centers. The capital of the 
confederation was Lubec, and there, once in three years, meet- 
ings or congresses called ^^Diets'' were held of delegates from 
all the various towns of the confederation. At these congresses 
the commercial interests of the various districts were discussed 
and ways and means provided to improve the general state of 
Proceedings of ^^^^0, chicfly by affording security to property, 
the Hanseatic The highways had been infested with robbers, who 
Congresses plundered wagon trains of their cargoes as they 

proceeded through the country, or dragged innocent travelers 
into captivity and held them for ransom. These depredations 
were chiefly instigated by princes and nobles who inhabited 
strongly fortified castles upon almost inaccessible rocks, and 
lived in ease and profligacy by means of their piracy upon com- 
merce, both land and sea. In order to resist this wholesale 
robbery the congress required each town to furnish its quota 
of men and money for the general defense and punishment of 
offenders both by land and sea, and in addition to this to main- 
tain a militia of both cavalry and infantry proportionate to its 
size or population. These were armed with cross bows, battle 
axes, maces and lances. The martial spirit was kept up by 
reviews. In addition to the regular militia, the larger towns 
employed mercenary troops, the whole amounting to almost an 
army. Thus peace and security were secured largely through 



68 HISTORY OF COMMERCE. 

the administration of the congress at Lubec^ and as a result^ an 
astonishing success marked the history of Hansa commerce. 
Under direction of the congress agents were appointed in the 
different Hansa towns^ with the special view of developing for-^ 
eign commerce. Agencies were opened in new territory^ and 
some of these afterward became permanent settlements^ as Lon- 
don, England^ and Novgorod^ Eussia. In order to improve the 
money systems prevailing^ mints were established in several of 
the important towns^ and although no uniform system of coin- 
age was in use the coins of several towns were current through- 
out a large extent of territory. 

The proceedings of the Hansa congress are interesting on 
account of it being the first purely representative body ever 
convened for commercial purposes^ and are especially valuable 
as indicating the beginning of the idea of co-operation among 
peoples having diverse interests. There can be no doubt but 
these deliberations were highly beneficial in promoting civiliza- 
tion as well as commerce^ for we find from about the middle of 
the fourteenth century evidence of a general improvement and a 
rapid increase in wealth. By this union^ piracy was driven 
almost wholly from the North and Baltic Seas and compelled to 
seek its prey on the shores of France or Britain; the vehicle and 
caravan trade by land was protected^ and a general spirit of 
order began to prevail throughout central Europe, affording 
Effects of the sccurity to property and promoting intercourse 
Hanseatic amoug the pcoplc, thus beginning the dawn of that 

eague intellectual and commercial awakening which was 

to follow the night of the dark ages of lawlessness and ignorance. 
The result was seen in the improvement in agriculture and 
manufacture all over central Europe, and even in adjoining 
countries. Fields were cultivated where forests stood before. 
Towns and villages sprang up where huts were located. People 
began to discard the use of the skins of bears and wolves for 
clothing, and to substitute woolen, cotton and silk cloth. The 



Longitude West from Greenwich 10" 



0° 




Longitude 



10" 



70° 



30° 




Trade Centers 

OF THE 

Middle Ages, 

Trade Routes Shown thus: 

Common Land Routes: 

Hanseatic League: ,__ 

German: 

Frencli: 

bpanisn: o&coo o oc 03000 00000 
Portuguese: 

Scale of Miles 

25 50 190 150 20 2 50 3 00 350 400 4 'jO 50 

R. L. Hollett. Engraver. Chicago. 

Greenwich 30 ° 



GEUMAXY. 59 

League exerted its power and influence to protect shipwrecked 
sailors from murder, a barbarity which had been all too common 
before. It passed navigation laws, and improved the art of ship- 
building. Its good work continued until the Thirty-years' war 
(1619-1648) prostrated the commerce and industries of Germany, 
and then its functions gradually ceased, after having rendered 
inestimable service to the cause of commerce in mediaeval and 
modern Europe. 

Passing over the history of Germany prior to the Thirty- 
years w^ar, a history of wars, feuds, successions and religious 
contentions, we find the country at the close of that conflict 
almost depopulated in its rural districts, its commerce destroyed, 
German Com- its pcoplc burdened with taxes, and its territory 
Thirty Years'^ divided iuto a multitude of small states. This 
War war had been one of religion, and was character- 

ized by all of the bitterness which usually accompanies religious 
disputes. The only cities that survived the general ruin were 
Lubec, Hamburg and Bremen, and these had suffered severely. 
Seeing the decline of their commerce, these latter two cities took 
up new lines of trade and kept up an active commerce with west- 
ern Europe, providing the whole of North Germany with foreign 
and colonial products, while Lubec continued to be the chief sea- 
port of the Baltic trade. Little progress was made by Germany 
in commerce or the industries during the next hundred years, 
owing to its continual wars with France, Spain and other 
nations. Nearly all of the articles then considered as luxuries 
by the people, such as silk, glass, porcelain and gloves, were 
either imported from England or France or manufactured 
through government aid. The spinning and weaving of linen, 
however, was engaged in to a considerable extent, as well as the 
manufacture of woolen cloth. Prussia endeavored to encourage 
the revival of the arts and industries by importing artisans. 
Gradually agriculture and cattle raising increased to a consider- 
able extent in the most fertile districts and a small export trade 
grew up. 



60 HISTORY OP COMMERCE. 

About the middle of the eighteenth century (1750) commerce 
showed a decided awakenings and it became necessary to im- 
prove the banking and commercial facilities of the country. 
Banks and trading companies were organized^ and roads^ canals 
and harbors were built. Manufactures multiplied, and the volume 
Revival of ^^ ^^^ cxports and imports was greatly augmented. 

German The cousumptiou of coffce^ tea, rice and tobacco 

ommerce largely increased, and the liberality of the German 

court encouraged the importation of luxuries. Hamburg han- 
dled the bulk of the imports from England and farther coun- 
tries, and Bremen wheat from France. The Ehine and the Elbe 
became great highways of commerce again, and the towns on 
their banks once more began to grow and prosper. Each city 
usually developed some peculiar industry. Thus Cologne mo- 
nopolized the trade in Rhine wines; Leipsig the publishing and 
book-selling trade; Frankfort-on-the-Main was the chief finan- 
cial center of North Germany. Thus we see that by the middle 
of the eighteenth century Germany had reached a high degree 
of prosperity and commercial importance. Then came the war 
of the American Revolution, which made a demand for German 
products in England, and this was followed soon after by the 
French Revolution and the Napoleonic wars, so that large quan- 
tities of German agriculture and manufactured products were 
exported and the country continued prosperous until it fell 
under the iron heel of the Great Napoleon. 

Immediately upon the invasion and subjugation of Germany 
by Napoleon in 1805, he issued a decree that no more wheat 
should be sold or shipped to England. This lost Germany a 
good customer. Under Napoleonic rule (1805-1815) German 
ports were in a state of semi-blockade, but this was not an un- 
mixed evil, for it caused the people to turn their attention to 
raising many products which they had heretofore imported. 
The war in America had cut off the supply of tobacco, and now 
its cultivation was begun and continued very successfully. Many 



THE ZOLLVEREIN. 61 

of the raw products heretofore imported to supply the factories 
of Germany and for home consumption had now to be raised at 
Deveio ment homc. Flax was largely grown; beets were raised 
of Home and the beet sugar industry commenced. Cotton 

Industries ^^^ ^^^j ^^^ ^^^ homo mills were extensively 

produced, and the manufacture of cloth was given a new 
impetus. German mines so rich, were developed especially in 
iron, coal and silver, and the people learned to rely upon and^ 
develop the resources of their own country. Now that the 
American colonies had become independent and England no 
longer enjoyed a monopoly of their trade, a considerable com- 
merce sprang up between them and Hamburg and Bremen. 
These cities continued to reach out after the commerce of the 
world with characteristic enterprise, and their ships carried on a 
profitable trade with the West Indies and South America. 

After the abdication of Napoleon in 1815 peace returned to 
Europe, and German ports were thrown open to the manu- 
factured products of England. The English had more improved 
machinery and were able to turn out goods at less cost than the 
factories of Germany. As a result English goods flooded the Ger- 
man markets, and for a time produced a general depression and 
stagnation in the industries of Germany. Hard times prevailed, 
the cotton, iron and steel industries especially being depressed. 
To remedy the difficulty, tariff laws were enacted. Germany 
at that time was a loose confederation of independent states, 
and hence there was very little uniformity in the tariff laws. 

Several states would form themselves into a league 
The zoiiverein ^ud cuact uuiform tariff laws, then other leagues 

of states were formed, and finally after several 
years the tariff laws became uniform through the efforts of the 
Customs Union or Zoiiverein. Treaties of commerce were made 
by the Zoiiverein with England, France and other European 
countries, and the industries of Germany became prosperous 
again. 



62 HISTORY OF COMMERCE. 

By the year 1830 the revival of trade and industries in Ger- 
many had fully set in. New machinery had replaced old meth- 
ods in the silk^ woolen and cotton factories^ and now woolen 
goods formed a very important part of the export trade. Iron 
and steel industries sprang up^, incident to the advent of the 
age of machinery. Glass^ paper^ pottery^ porcelain and hardware 
Revival of became extensive products^ as well as chemicals^ 

German dycs^ sugar and beer, all of which were largely 

Commerce exported. After the Franco-Prussian War, the 

German states including Prussia were united into a compact 
government, and King William was crowned Emperor of Ger- 
many in the Palace at Versailles. This event brought unity to an 
incoherent collection of petty states, and under the skillful 
leadership of Prince Bismarck the new empire has steadily 
grown in power and influence until it now ranks as the second 
nation of Europe in wealth and commercial importance. Ger- 
many is rapidly changing the character of her industries and 
becoming a manufacturing and commercial^ rather than an 
agricultural nation. 

In the past fifty years the manufactures of Germany have 
nearly doubled, its commerce trebled, its shipping increased 
five fold, and its mining six fold. Her production of iron has 
The Present increased ten fold in fifty years. Her mines give 
Commerce of employment to over a half million men. By the 
ermany ^^^ ^^ labor-saving machines one man can now 

produce as much as three men could produce fifty years ago. 
Germany has 750 factories devoted to the making of machinery 
alone. One of these, the Krupp Gun Works at Essen, is the 
largest in the world, employing 20,000 men and covering a 
space of one thousand acres. Hamburg and Bremen still lead 
as ports of entry. Dantzig is the chief seat of its great export 
trade in timber, grain, flax, hemp and potatoes. Leipsig is the 
greatest fur market in the world, and the seat of the book 
publishing trade. Frankfort as a financial center has been 



THE ZOLLVEREIN. 63 

compelled to take a place second to the capital, Berlin. Dresden 
is noted for its porcelain and Nuremburg for its clocks and 
watches. 

Germany has given considerable attention to the practical 
education of her people, especially in the field of commercial 
education. Her commercial success is no doubt attributable 
in a large degree to her system of education. Her artisans are 
not only skilled in their trades, but a large proportion of them 
are men of high scientific attainments in the branches pertaining 
to their work. Since the learned professions and official positions 
are the exclusive preserves of those born to social rank, the 
educated commoner must of necessity betake himself to manu- 
facture, trade or commerce, and it follows that much of the best 
brains of the empire is devoted to business pursuits. 



CHAPTEE VII. 
COMMERCE OF FRANCE. 

FLEMISH COMMERCE AND MANUFACTURES; AGE OF LOUIS XIV; 

COLONIAL POSSESSIONS; REVOCATION OF THE 

EDICT OF NANTES. 

Before entering directly upon the history of French com- 
merce, let us refer briefly to a small country called Flanders, 
which during the middle ages existed and flourished directly 
north of France, upon the shore of the North Sea, occupying a 
portion of what is now Belgium. We have already had occasion 
Commerce and ^^ alludc to the trading ships of Venice and Genoa 
Manufactures and their voyages northward along the coast of 
France as far as Flanders. Numerous testi- 
monies are found in history as to the flourishing condition of 
Flemish manufactures as early as the twelfth century. The 
weaving of woolen cloth was their most important industry, and 
a writer of the thirteenth century asserts that ^^all the world 
was clothed from English wool wrought in Flanders.^' This is 
an exaggeration, but Flemish woolens were probably sold wher- 
ever the sea or a navigable river permitted them to be carried. 
England and Spain furnished the raw wool and Flanders worked 
it up into cloth. English wool was superior to the Spanish for 
fine cloths, and the Spanish wool was mixed with the English in 
the production of medium grades of cloth. Bruges and Ghent 
were the two chief manufacturing and commercial centers of 
Flanders, and each of them at one time had not less than forty 
thousand looms constantly at work. 

Bruges was the termination of the route down the Ehine 
from Italy and the East, and before Lisbon eclipsed her, through 
the rise of Portuguese commerce and discoveries, was the chief 

64 



FRANCE. 65 

distributing point whence cargoes were transhipped for the 
Hansa towns. Here the products of Asia and Africa^ as well 
Flemish ^^ Europe, cauie to be exchanged for the woolens. 

Growth and vclvetS;, silks and linen fabrics from the looms of 

Decline Flaudcrs and Netherland cities. In the latter 

part of the fourteenth century Bruges was a market for the 
traders of the world, and we are told that ^'^merchants from 
seventeen different kingdoms had their settled domiciles there, 
besides strangers from almost unknown countries who repaired 
thither.^^ 

The reason for the decadence of the commerce and prosperity 
of Flanders may be found in a combination of causes, one of 
which was that England gradually established manufacturing 
industries of her own and began to weave not only her own 
cloth but that of other nations, thus depriving Flanders of 
her most profitable customers; another was in the rise and com- 
petition of the Hansa towns, which destroyed the monopoly of 
Bruges as a distributing point and commercial center; the growth 
of Portuguese commerce which transferred the distributing cen- 
ter from Bruges to Lisbon; the growth of Dutch maritime com- 
merce directly with India, by which transhipment of cargoes no 
longer became necessary either at Bruges or Lisbon. What was 
lacking to complete the ruin of Flemish commerce and manu- 
factures from these causes, was easily furnished near the close 
of the sixteenth century by the religious wars and persecutions of 
the weak and narrow-minded Philip II. Antwerp drew away a 
portion of the commerce of Bruges; many of her weavers emi- 
grated to England, and the political control of Flanders passed 
to Spain, Austria and thence to France. 

French commerical history may be said to begin about 
the period of Louis XIV (1643-1715), about the middle of the 
seventeenth century, for prior to that time the industries and 
commerce of the nation were in a very backward state. French 
merchants had, for a century before, been trading in a small 



66 HISTORY OF COMMERCE. 

way along the west coast of Africa, and French colonies had 
been planted in Madagascar and some of the islands adjacent 

thereto. The French had also made some efforts 
Commerce^^ to establish a footing in India, and in 1624 the great 

French East India Company was formed for the 
purpose, but later it was driven out by the English. The French 
do not appear to have been navigators or explorers like the Portu- 
guese or Dutch, and except in North America were never very 
successful as colonizers. Internal commerce in France was like- 
wise in a neglected and undeveloped condition prior to the 
advent of Louis XIV. Silk raising and weaving had been carried 
on to a limited extent during the sixteenth century, and the 
manufacture of woolen goods spread from Flanders into north- 
ern France and along the banks of the Ehine. Agriculture was 
very much neglected, and the peasants were unmercifully taxed 
to support an extravagant and dissolute nobility and maintain 
the succession of wars which cursed the realm. What with the 
Hundred-years war with England (1337 to 1453); the massacre 
of the Huguenots on St. Bartholomew night (Aug. 24, 1572), by 
which 100,000 persons were murdered in cold blood; the perse- 
cutions of the Jews, resulting in driving thousands of industri- 
ous and peaceable citizens from France, and the constant strife 
and commotion which prevailed, is it any wonder that commerce 
was at a low ebb? 

The reign of Louis XIV has been called the Golden Age 
of France, in material prosperity as well as in art and literature. 
It was to France what the Elizabethan age had been to England. 
Louis XIV was called the Grand Monarch, and such he proved 

to be in many respects, displaying remarkable 
Louitx^iv talents as a ruler. He surrounded himself with 

men who merely executed his will, and in the 
choice of these he showed rare ability and judgment. His min- 
isters, especially Colbert, the great promoter of French industry^ 
manufactures and trades, were men who surpassed the statesmen 



FRANCE. 67 

of most other countries of the time. Colbert's activity was 
unflagging. He set himself to develop the country on every side. 
He especially devoted himself to building up manufactures and 
commerce^ the construction of routes of travel by both sea an(J 
land. He revived old manufactures and introduced new 
ones^ such as tapestrieS;, silk mosaics^ cabinet work, lace, 
pottery, steel work, and the like. Fine cloth had hitherto 
been brought from England, but by his judicious patronage its 
manufacture was established in France. By encouraging the 
growth of mulberry-trees he enabled the silk manufacturers to 
dispense with the importation of raw silk. The art of making 
plate glass was imported from Venice, and the name ^Trench 
plate glass'' is synonymous with excellence to this day. The art 
of carpet w^eaving he introduced from Turkey and Flanders, and 
in these the French soon learned to excel their masters. A ma- 
chine for weaving stockings was introduced from England; tin, 
steel, porcelain and morocco leather, hitherto brought from 
foreign countries, were now manufactured in France. 

The development of French colonial ambition was also due 
largely to the sagacity and labor of Colbert. The French had not 
been verv successful in the East, but Colbert turned his attention 
to the more promising field of the western world. Before James- 
town was built or the Pilgrims landed at Plymouth Eock the 
French had planted feeble colonies in New Foundland (1535) 
and Nova Scotia (1602). This territory, called ^^Arcadia," was 
p^^^^j^ ceded to England by the treaty of Utrecht in 

Colonial 1713.* They also made settlements in New 

Possessions Bruuswick (1672) and Cape Breton Island (1714), 

but the most important French colony was that of Canada 



*On account of the disloyalty of the people to England, which amounted 
to openly assisting the French in the wars which occurred between the 
two nations, the people of Arcadia were inhumanly punished by England in 
1755. Seven thousand of them were forcibly put aboard ships and trans- 
ported to the English colonies, where they were scattered around. Their 
villages were burned and their fields destroyed. 



68 HISTORY OF COMMERCE. 

(1608) which lay along the St. Lawrence with its post of Quebec. 
From this French missionaries and explorers pushed further 
west^ and were the first white men to behold the Falls of Niagara 
and explore the Great Lakes. Trading posts were established 
by them in the region around the Great Lakes^ and later these 
became centers and rallying points of civilization. Such were De- 
troit and Chicago. In 1673 Fathers Marquette and Joliet discov- 
ered the Mississippi Elver and sailed down it to Arkansas. Nine 
years later Eobert de La Salle completed the work which they 
had begun by passing down the river to its entrance into the 
Gulf, and taking possession of the country on its banks and at 
its mouth in the name of his king, in whose honor he named 
it Louisiana. 

It became one of the ambitions of Louis XIV to glorify his 
reign by creating for France a colonial dominion on the banks 
of the great "Father of Waters'^ which would rival or eclipse 
the flourishing colonies of England on the Atlantic coast. Ac- 
cordingly several expeditions were sent out from time to time 
to colonize the new territory of Louisiana; the Mississippi Com- 
pany was formed under the management of the visionary finan- 
cial theorist, John Law. Money was lavished upon the enter- 
prise, and emigrants were sent thither. New Orleans was 
founded and settlements made up the river as far as the present 
city of Natchez. Upon this sickly colony and previous explora- 
tions the French laid claim to the whole Mississippi Valley and 
the vast domain stretching away to the northwest.* But the 
English claimed that their possession of the Atlantic seacoast 
carried with it a valid title to the country in the interior for 
an indefinite extent westward. In conformity with this idea 



♦The Louisiana Territory purchased in 1803 by the United States from 
France extended northward to practically the boundary line of British 
America. This boundary was somewhat indefinite. Thence it extended 
westward to the territory of Oregon and took in the whole of the United 
States Avest of the Mississippi river except Texas, Washington, Oregon, 
California and what the United States got from Mexico by treaty and 
purchases. 



FRANCE. 69 

the charters of several of the English colonies read to include 
territory stretching across the continent from sea to sea. This 
Contentions was the basis of the conflict between the English 
UsHnd^F^rnch ^^^ French colonies in America. When the two 
Colonies nations were at peace^, the controversy led only 

to border disputes^ but when England and France were at war, 
their respective colonies in America also engaged in a murder- 
ous conflict, intensified and made more shocking by the Indian 
element enlisted in it. A plan was formed by the French to 
construct a line of forts stretching from Lake Erie down the 
Ohio Eiver, and thence down the Mississippi to Louisiana, thus 
hemming in the British settlement on the east of the AUe- 
ghaneys. This project soon brought on a conflict with the Ohio 
Company, an association formed in London and Virginia, which 
had obtained from the crown a large tract of land along the 
Ohio River, where it had erected trading posts. George Wash- 
ington, then a young officer in the militia service, was sent out to 
warn the French away. Receiving an unsatisfactory answer. 
General Braddock with a body of troops was later sent out to 
drive them away. The story of the conflict which followed, 
lasting ten years (1753-1763), resulting in the campaign against 
Quebec and the death of Wolf on the Heights of Abraham, is 
familiar history. By the treaty of peace which followed the 
French relinquished all claims in North America except the 
Territory of Louisiana.* 

Colbert applied himself diligently to building up manufact- 
ures at home and commerce abroad. He encouraged trade w^ith 
the French colonies in Canada and the West Indiesj as well as 
with the Mediterranean coast and Africa. Under his influence 
heavy duties were imposed on imports in order to stimulate 



*By the treaty of Utrecht in 1713 the French had ceded to England, 
New Foundland, Nova Scotia, New Brunswick and the Hudson Bay Territory. 

f France acquired Guiana in 1626, colonized Guadeloupe in 1634 and Mar- 
tinique in 1635. Acquired a portion of Hayti in 1697, which it held until 
1797. 



70 HISTORY OF COMMERCE. 

home productions^ and bounties and subsidies were given to en- 
courage exports. Commercial treaties were formed and trading 

companies organized to develop new fields of pro- 
Home *°"^ ^ duction and commerce^ such as the Territory of 

Louisiana. The imports at the time were 
chiefly raw silk^ wool^ flax^ cattle and colonial products^ coffee, 
sugar/ tobacco and spices. The exports were mostly wine, fine 
silk goods, and woolen cloth. But notwithstanding the efforts of 
Colbert and the great ability which he displayed in fostering the 
commercial interests of France during the reign of Louis XIV, 
the prosperity of the kingdom did not rest upon a stable and 
permanent foundation. The wars which were waged by the king 
for the purpose of enlarging his realm and glorifying his reign 
made France under Louis XIV the foremost power in Europe, 
but drained the country of money and men. The oppressive tax- 
ation necessary in order to carry on these wars, maintain an ex- 
travagant court and withal construct the grand palace and 
gardens at Versailles, which outshone all the kingly palaces of 
Europe, together with the religious dissensions and persecutions 
which stirred up the country, made commercial and industrial 
progress and prosperity difficult and uncertain. Had it not been 
for the natural productiveness of the fields and vineyards of 
France, and the rich territory of Alsace, Burgundy and Flanders 
wrung from Germany as trophies of the Thirty-years war, it is 
difficult to conceive how the people could have carried their 
burden. 

One of the most serious blows to the prosperity of the peo- 
ple, as well as the greatest blot of shame upon the reign of 
Louis XIV, was his persecution of the Huguenots. He believed 
Revocation ^^^^ ^^^ uuity of the church was inseparable from 

of the Edict a perfect monarchy, and hence began a series of 

of Nantes oppressive proceedings against all dissenters from 

the established religion. Colbert, who esteemed the Hugue- 
nots as active, industrious and thrifty citizens, prevented for a 



FRANCE. 71 

time these violent measures, but his influence was not sufficient 
to stay the hand of illtempered religious zeal. The Huguenots 
were excluded from office and denied many civil and political 
rights. The number of their churches was limited, and these 
were confined to a few of the principal towns; children were 
torn from their parents and brought up as Catholics, and finally 
companies of cavalry were sent among these quiet people to 
coerce and intimidate them. At last (1685) came the Revocation 
of the Edict of Nantes, taking away all rights from them. Their 
religious worship was forbidden, their churches were destroyed, 
their preachers banished and their schools closed. When the 
emigration from the realm became so serious as to be really 
alarming, it was strictly forbidden, and the shores and bound- 
aries of France were closely guarded. But despite threats and 
guards, more than half a million industrious, law-abiding and 
wealth-producing citizens left France, carrying with them their 
industry and their faith. Many of them went to England, and 
others to Holland, carrying their silk manufacturing and stock- 
ing weaving with them. Still others settled in Switzerland and 
Germany, while a few found their way to America and settled in 
North Carolina.* 



*The Edict of Nantes was a decree of toleration issued by Henry IV in 
1598 guaraoteeing freedom of worship aud equality of rights to Protestants. 



CHAPTER VIII. 

COMMERCE OF FRANCE— Continued. 

COLBERT; JOHN LAW; THE FRENCH REVOLUTION; NAPOLEON'S 
POLICY; RECENT FRENCH COMMERCE. 

Louis XIV lived to see his kingdom torn and distracted, his 
conquests lost^ a large portion of his colonies in the possession 
of his enemies, and a smouldering hatred for each other arise 
among his subjects. Monopolies were multiplied in order to 
meet the needs of the nobles, of whom there were one hundred 
and forty thousand in France at that time. Together with the 
clergy, they owned the best mines and farm lands; all of the 
large and handsome buildings, the palaces and castles and even 
the best of the movable property. They escaped taxation, dis- 
dained labor and eagerly seized and consumed the hard-earned 
products of the poor laborers. Under the wanton luxury of 
his successor, Louis XV, silk weaving revived some- 
Loui^xv what, and agriculture improved, but the country 

was practically bankrupt. Farmers were nearly 
everywhere poor renters of their small holdings, weighed down 
by tithes and heavy taxes, while the lords lived in their castles or 
in the principal towns or Paris, squandering the income wrung 
from their miserable tenants. 

About this time there appeared in France one John Law, 
a Scotchman, who offered a solution of all the country's diffi- 
culties. He proposed to liquidate the vast indebtedness with 
which the ambitious schemes of Louis XIV had burdened 
France. This was so enormous that the whole annual revenue 
scarcely sufficed to pay the interest. He founded a Land Bank 
(1716) and organized the Mississippi Company. In consider- 
ation of his liquidating the public debt, his bank was made a 

72 



MISSISSIPPI BUBBLE. 73 

state institution and authorized to issue a paper currency. He 
then issued inconvertible notes to the amount of the value of 
John Law the land of the kingdom based upon the land itself 

Land Bank and ^^ ^ supposcd sccuritv. Fraucc was flooded with 

Mississippi ^^ ^ 

Company this inflated currency. Prices of all commodities 

rose, the rate of interest advanced, and stock in the bank 
was in great demand. Law was able to declare a bank dividend 
of forty per cent, payable in paper money. Seeing that Law was 
such a remarkable financier and his bank so prosperous, the peo- 
ple were eager to participate in his Mississippi scheme. The desire 
to purchase shares in this scheme now amounted to a frenzy. 
Enormous profits were expected to be realized by the Mississippi 
Company from its supposed gold mines yet undiscovered, and 
from planting and commerce. The new company grew and 
expanded, absorbed the East India Company, increased its capital 
stock to six hundred and twenty-four thousand shares of five 
hundred and fifty francs each, and offered to lend the govern- 
ment a billion six hundred million francs at three per cent. 
Paris was wild with excitement. The shares in the Mississippi 
Company rose in the market to forty times their par value. 
Everybody seemed to grow rich. Law worked his two schemes, 
the bank and the Mississippi Company, side by side, and one 
helped the other. Through the bank he infiated the currency, 
making it possible to float the Mississippi scheme, and as fast 
as the stock of the Company was sold, the money flowed back 
into the bank, enabling it to be used in making bank dividends. 
Government bonds, which a short time before had been selling 
at twenty cents on the dollar, so low was the credit of the king- 
dom, were redeemed by Law at par, and investors became eager 
to buy government securities. Land was bought and sold at 
fabulous prices. New issues of paper currency continued to be 
made until the total reached almost to the enormous sum of 
two thousand million francs. All the while the specie was quietly 
going out of France, and there was nothing but credit left as a 



74 HISTORY OF COMMERCE. 

basis for the money circulation. Finally^ after four years of 
financial rioting in the wildest schemes and theories^ credit 
became strained to the breaking point. The bubble burst and a 
panic ensued. Law became a fugitive. Ruin and despair spread 
through the kingdom^ and an insurrection of the common people 
was imminent^ but with great difficulty was prevented. The 
terrible day of reckoning had not yet come. It is a strange co- 
incidence that while the Mississippi scheme was in operation in 
France a similar gambling mania^, in the form of the South Sea 
Bubble^ held possession of England^ and another of the same 
kind infatuated Holland. They all three collapsed about the 
same time and with the same effects. 

After the failure of John Law's scheme;, the commerce 
of the country was depressed and manufactures did not improve. 
In 1756 began the Seven-years war (1756-1763) with 
England;, by which France lost all of her American 

colonies except Louisiana. The commercial su- 
ReacSon^" prcmacy of Europe, and of the world, then passed 

over to England. The treasury of France was 
empty, the country in debt, credit gone, and the people borne 
down with financial burdens. The new king (Louis XVI) was 
weak and injudicious, and the queen frivolous and extravagant. 
The war for American independence had been brought to a 
successful issue, and had aroused the spirit of popular liberty 
in France. Under these conditions the common people in 1789 
rose in revenge for the wrongs they had suffered for centuries, 
and inaugurated the great French Eevolution. 

Peaceful commerce could not exist during a reign of anarchy. 
Terror made property insecure, and the wealthy fled from the 

country, carrying their portable wealth with them. 
Revolution ^^ scarcc had coin become in the first year of the 

Eevolution, that large issues of paper were re- 
sorted to, and it was made a capital offense to refuse to receive 
this at par; but foreigners were not bound by the statute, and 



UNDER NAPOLEON. 75 

took from the country all of the gold and silver that was not 
hoarded. The paper currency sank lower and lower in purchas- 
ing power, until a pound of butter could not be had for less than 
700 or 800 francs, and a pair of boots cost as high as 10,000 
francs. Internal trade and manufactures were prostrated and 
foreign commerce annihilated. 

At this juncture Napoleon appeared upon the scene of action, 
and in 1806 issued what has been called his Berlin Decree, by 
which he hoped to destroy British commerce by sealing the ports 
of the entire continent against English vessels. England retali- 
ated by capturing French ships and colonies, and thus for several 
years the ports of Europe dared not admit English vessels for 
fear of the wrath of Napoleon nor permit their own vessels to 

leave their moorings for fear of British cruisers. 
Poiicy^°" ^ '^^^ commerce of Europe as well as England was 

thus seriously injured, while the decree caused 
manufactures and home industries in France to revive, in an 
effort to meet the demand for goods which could not be im- 
ported. Napoleon laid down the principle that France should 
be self-sustaining in the production of all that was necessary 
for her maintenance. He increased the duties on imported 
goods, rigorously protected trade marks, and re-estab.lished 
several of the old trade corporations. To supply the loss of 
colonial produce, no longer obtainable from the English colonies, 
tobacco and corn were cultivated, and for the purpose of making 
sugar to take the place of cane-sugar, no longer obtainable from 
San Domingo on account of the negro revolution, beet-sugar was 
invented and the beet extensively cultivated. Cotton, linen and 
woolen goods were extensively produced and manufacturers were 
busy, but not having to compete with foreign imports clothing 
was neither good, cheap, nor abundant. Eoasted beans were 
substituted for coffee, soda for potash, and bleaching, dyeing, 
tanning, distilling and other arts depending upon chemistry 
were greatly promoted by means of ingenious substitutes. 



76 HISTORY OF COMMERCE. 

''To Napoleon is due the creation of Chambers of Commerce 
and Manufactures^ of the Conseils de Prudhommes or mixed 
juries of the most skillful operators and masters for settling 
industrial disputes, workmen's certificates^ and the institution of a 
property in trade marks. He constructed and repaired ten thou- 
sand miles of roads, crossing in some instances mountains by 
highways worthy of the Eomans, built bridges and canals, and 
beautified Paris/' 

One of the beneficial effects of the Eevolution was the change 
in the tenure of land in France. Prior to that event enormous 
estates were held by the nobility and aristocracy, which had 
descended from generation to generation without division. It 
was ordained that thereafter estates should be equally shared by 
all the children of a proprietor dying intestate. This soon result- 
ed in dividing the soil into numerous small allotments, as it is 
to-day, resulting in better cultivation of the land and a more 
thrifty and better contented peasant class. 

After the battle of Waterloo and the final abdication of 
Napoleon, it was hoped that France would see a return of peace 
and a revival of commerce, but for several years in succession 
her harvests were poor, taxes to defray the expenses of the 
previous wars continued heavy, and the country seemed politi- 
cally and commercially exhausted. Its foreign trade had been 
so long lost that it had to be built up anew, and this proved a 
slow process, for other nations had secured possession of the 
markets. Meanwhile machinery had greatly improved in En- 
gland, and its exportation being strictly prohibited by Parlia- 
p^Qj^ ment, England was able to undersell France. But 

Waterloo to the Frcuch bent their energies with vigor to the 

apoeon ^^^^ ^^ buildiug up their industries, and soon 

so distinguished their wares by the excellence of their quality, 
that in ten years they were abreast of their rival, England, 
in many lines of manufacture and in bleaching and dyeing they 
far surpassed her. In 1825 the prohibition against the exporta- 



FRANCE. 77 

tion of British machinery was repealed, and this left the French 
free to profit by English inventions. A general desire for in- 
dustrial improvement seemed to pervade France, and capital 
returned to the channels of industry and commerce. Silk and 
cotton weaving, paper making, carpet weaving, tanning and kin- 
dred arts, all became prosperous. Agriculture, however, failed 
to show a corresponding degree of improvement, owing, no 
doubt, to adverse or indifferent legislation. Although 53 per 
cent, of the French people depended upon the cultivation of the 
soil for their subsistence, wooden plowshares, harrows with 
wooden teeth, and in the southern provinces, the Oriental mode 
of oxen treading out the grain, still remained in use up to the 
time of Napoleon III. 

The policy of Kapoleon III was favorable to agriculture and 
commerce. He encouraged the rearing of fine draft horses and 
the introduction of improved implements and methods of agricul- 
ture, thus raising the tillage of the soil to a place befitting the 
dignity of his empire. Unlike his predecessors, he did not 
Commerce regard the use of foreign products by his people as 

Napokoniii prejudicial to home indu^ries, but rather as a 
1848-1870 stimulus to better skill on the part of the me- 

chanics and artisans of France. Accordingly he reduced the 
duties on foreign goods and especially on foreign machinery, with 
a view to encouraging its importation from England and the in- 
troduction of improved processes of English manufacture. The 
rapid extension of the use of machinery in France under ISTa- 
poleon III, the introduction of steam power and the invention 
of the Jacquard loom* for weaving all kinds of figured goods, 
gave a great impetus to the industries of the country. In ten 
years, 1858-1868 the exports of France increased from 1,750,- 
000,000 francs to 3,000,0000,000 francs, the effect largely of the 



♦Jaquard was mistreated, his looms destroyed and he finally exiled for 
his invention, but he lived to be regarded as the father of modern French 
industry.— Yeats Vicissitudes of Commerce. 



78 HISTORY OF COMMERCE. 

so-called Cobden treaty with England made in I860, which 
greatly reduced the duties on foreign imports. 

In 1867 a grand Universal Exposition was held in Paris 
by which France showed to the world what excellent progress 
she had made in the arts of peace. The intelligence, ingenuity 
and enterprise of her inhabitants were here wonderfully dis- 
played, and it was apparent that in the production of fine silk 
and woolen goods, wines and brandies, furniture, glass, clocks 
The Universal ^^^ artistic warcs, as well as in art and matters of 
Exposition of tastc and education, France stood second to no 
^^^^ nation, if indeed she did not surpass all others. 

Three years after the Exposition (1870) the Franco-Prussian 
war broke upon the country, resulting in the defeat of her 
armies, the capture of the Emperor, Napoleon III, the loss of 
her valuable provinces of Alsace and Lorraine, and the payment 
to Germany of an indemnity of 5,000,000,000 francs. 

Notwithstanding these disasters, the trade and industries of 
France quickly revived and resumed their former prosperity. 
The wonderful natural productivity of France again manifested 
itself, and the war indemnity, enormous as it was, was quickly 
paid. There were in 1872 more than 200,000 hand looms 
besides 80,000 power looms at work in France, giving rise to a 
secondary but very important industry in the con- 
Recent French struction of their machinery. Lyons and the 

Commerce * p.i 

south of France produced large quantities of silk 
goods, and woolens were woven extensively in the north, while 
Eheims and Amiens turned out Cashmere shawls and other 
textures of long-fibered wool, exceeding in beauty the famous 
fabrics of India. Eouen on the Seine became the seat of the 
cotton industry, and received the title of the ^^Manchester of 
France/^ while Havre at the mouth of the same river corre- 
sponded to Liverpool as the depot for the importation of raw 
material and the place of export for the manufactured article. 
Agriculture, stock raising and wine growing flourished, and glass, 



FRANCE. 79 

porcelain, and fancy articles of jewelry and furniture were pro- 
duced in considerable quantities and found a ready market. The 
Bank of France, established in 1803, became the great central 
financial agent of the country second only in consequence to the 
Bank of England, while the Paris Bourse took rank as one of the 
great Stock Exchanges of the world. 

Although one of the Great Powers of Europe, France has 
never, since the sale of Louisiana, possessed extensive colonies. 
Her West Indian possessions and the settlements in Asia were 
too small to affect either her commerce or revenue. Algiers was 
acquired in 1830, but never proved remunerative 
Colonel Trade ^^ France. Several small holdings on the west 
coast of Africa yield valuable products in ivory, 
gold, oil and cotton, and recently France has acquired a footing 
in Indo-China from which she derives silk and rice. Colbert^s 
East India Company planted four small settlements in Madagas- 
car, and that island may prove a profitable holding in the future. 
During the past quarter of a century, as compared with 
Germany and England, France has been losing ground as one 
of the great nations, and has failed to make the progress which 
her natural advantages of soil and climate should enable her 
to make. The upper classes are excessively fond of dress, pleas- 
ure and military glory, and, as a result, the energies' of the 
nation have not been well directed. The national debt is the 
greatest, per capita, of any nation, being seventeen and one-half 
times as great as that of Germany, six times that of the United 
States and one and one-half times that of Great Britain. The 
bulwark of France is in the stability of her peasantry. These 
Present surpass in industry, thrift and frugality all other 

Condition of pcoplcs of Europc, and if France were well gov- 
erned, its prosperity would equal if not surpass 
its neighboring nations. Eural France is divided up into 3,500,- 
000 small farms, a large majority of which are cultivated by the 
owners, thus giving a self interest and stability to the population 



80 HISTORY OF COMMERCE. 

and to agriculture of the greatest value to the nation. Having 
ready markets near at hand in Paris and other large cities^ a 
considerable portion of these farms are devoted to raising small 
but profitable crops^ such as potatoes, fruit, poultry and the 
like. In 1882 the vineyards of France were ravaged by an insect, 
entailing a total or partial loss of over 4,000,000 acres, valued at 
$1,000,000,000. The pests were finally exterminated, but the 
wine industry was prostrated, and since that time a large portion 
of the wine used in domestic consumption has been annually 
imported. 

In 1900 the French gave another great Exposition in Paris, 
to exhibit at the close of the century the progress of the world 
in the arts and sciences. Within the palaces of that exposition 
were gathered the best products of the hand and brain of man 
from all parts of the world. It was apparent that France was 
abreast of the great nations in processes of manufacture, and 
that in articles of luxury, such as silk, glass, porcelain, jewelry, 
furniture and brandy, she surpassed all other nations in the 
artistic character of her wares. 



CHAPTEE IX. 

COMMERCE OF ENGLAND. 

BEFORE THE NORMAN CONQUEST; ENGLISH WOOL; ELIZABETH'S 
POLICY; CARRYING TRADE. 

While the Mediterranean was dotted with the commerce of 
the Phoenicians and Carthaginians^, the British Isles were in a 
semi-barbarous state^ the inhabitants living in huts and possess- 
Ancient ^^S ^^^ rudcst implements to supply the bare 

English necessaries of life. The ancient commercial his- 

Commerce ^^^^ ^j thcsc islauds gavc uo indication of the 

greatness w^hich the empire of Britain was destined to achieve 
in the domain of commerce and manufacture in modern times. 
Separated from the mainland of Europe and the highways of 
Mediterranean civilization, the Britons remained passive, and 
waited at home for traders, chiefly the Phoenicians and Cartha- 
ginians, who visited their coasts, supplying them with trinkets in 
exchange for tin and lead ore found in abundance lying near the 
surface. Little progress was made in the scale of civilization 
until after the Eoman conquest. The wealth of coal and iron 
stored up in these islands was unknown. Herds of wild cattle 
and other animals roamed through the dense forests which at 
that time covered most of the area. Little attention was paid to 
agriculture and the natives lived chiefly upon fruits and the 
products of hunting. The invasion of the Eomans infused new 
life and intelligence into the people, and gave an impetus to 
their civilization. Thereafter hides, wool and furs are named 
as among their exports. English wool came to be so esteemed 
that merchants dealing in it were exempted from the peril of 
capture in war. Eventually wheat and cheese began to be 
regular articles of export. 

81 



82 HISTORY OF COMMERCE. 

Under Eoman rule (B. C. 54-A. D. 455) the Britons partook 
to some extent of the refinement of their masters^ and reached 
a higher state of commercial development than they again at- 
tained for several centuries. These enterprising rulers built 
roads^ cleared forests^ drained marshes^, opened mines^ improved 

agriculture, founded towns, and introduced a thor- 
RonTanRuie^ ough and vigorous system of government which 

was of the greatest benefit to the people. Under 
the reign of the Eoman emperor Augustus, we find that a con- 
siderable commerce had grown up, and Britain exported gold, 
silver, lead, tin and iron, besides considerable quantities of wheat, 
cattle, skins and wool. The imports were chiefly articles of 
luxury such as ivory, gold ornaments, amber and articles in 
glass. 

After the decline of the Eoman Empire and the withdrawal 
from Britain of its energizing and protecting power, came in- 
vaders from the mainland of Europe, the Saxons, Normans and 
Saxons Daucs, who plundered the people, disturbed their 

Normans iustitutious and ruined their commerce. Pirates 

ravaged the coast, and trade was checked by 
rapine and lawlessness, so that few foreign merchants would 
risk life and property for the profits of commercial intercourse 
with Britain. Now and then an enlightened king would en- 
deavor to cultivate and revive commerce and the arts of peace, 
but the history of English commerce is almost a blank until 
the time of King Alfred the Great (A. D. 870). He founded a 
navy of war galleys, each rowed by sixty or eighty men, in order 
to protect his merchant ships from the depredations of pirates, 
encouraged trade by cultivating friendly relations with foreign 
countries, and sent embassies even as far as India on missions 
of commerce. 

During the Middle Ages, the Baltic and North Seas were in- 
fested with pirates, chiefly Northmen, who regarded the mer- 
chant ships of neighboring states as their natural plunder. This 



ENGLAND. 83 

open highway robbery on the seas was for centuries the common 
employment of the younger sons of the royal and noble families 

of Denmark^ Norway and Sweden^ and was con- 
piracies sidcrcd a legitimate field in which they could win 

fame and fortune. During the eighth and ninth 
centuries the coasts of England^ Scotland and France suffered 
severely from the ravages of these pirates^ and as previously 
stated^ one of the incentives to the formation of the Hanseatic 
League was the mutual protection of the towns against piracy. 
Furthermore^ at that distant and unenlightened period, human 
jealousies and rivalries were stronger in many instances than 
the instincts of right and justice, and trading towns often re- 
garded the seas as the domain of the strongest and committed 
acts against rivals which would now be regarded as piracy. 
Individuals undertook to enforce, on their own account, repara- 
tion for maritime wrongs, and were not particular when the 
real offender could not be reached in substituting another. 

An important feature of the internal commerce of England, 
and other parts of Europe as well, during the Middle Ages, 
was the annual fairs which were held in the principal towns. 
These fairs were the means of bringing buyer and seller together, 
and a general interchange of commodities resulted. Owing to 

the limited facilities for travel and transportation 
Middle Ages ^^ goods, the lack of roads and vehicles, and the 

fact that the people traveled but little, it was a 
great convenience to have a common meeting time and place, 
where articles of manufacture from distant parts of the country 
or world could be exchanged, and the wants of the people thus 
supplied. The location of these fairs was usually determined 
by the question of convenience, the size and importance of the 
town, or the fact that a certain point was a shrine whence came 
pilgrims periodically to worship. Thus Mecca continues to 
hold a fair, where large quantities of goods are sold annually. 
The principal English fairs in the Middle Ages were: That of 



84 HISTORY OF COMMERCE, 

London^ known as St. Bartholomew's Pair, where wool and cloth 
were the chief articles sold. This fair was not entirely abolished 
until 1840. The fair at Winchester, where large quantities of 
wool were sold; and the great fair of Stonebridge, to which 
came merchants from all parts of Europe. This fair continued 
a month, and being near the coast was attended by ^^merchants 
of Venice and Genoa, with stores of eastern produce and their 
own manufactures of silks, velvets, cotton goods and glass. The 
Flemish brought the fine linens and cloths of Bruges, Liege, 
Ghent and other manufacturing towns. French and Spanish 
merchants came with their wines and fruits; the great traders 
of the Hansa brought furs and amber, iron, copper and other 
metals, flax, timber and grain, and all the products of the north. 
In the same way the English farmers, or traders acting on their 
behalf, carried to this fair, hundreds of huge sacks of wool for 
the manufacturing towns of Europe, barley for the Flemish 
breweries, with corn, horses, cattle, and many other goods!''* 

As means of transportation* and travel improved these fairs 
gradually declined, and in the age of railroads and steamsiiips 
have disappeared almost entirely as trading centers. The local 
store and the traveling salesman have superseded them. The 
principal fair in existence at the present time is that at Nijni- 
Novgorod in eastern Eussia, which owes its existence to the prim- 
itive condition of that part of the country, and the lack of trans- 
portation. t 

The Norman Conquest brought a change in dynasties in 
England, and with it contentions which retarded the progress of 
commerce. The Feudal system fettered vassals, while nobles 



♦GibbiDs' History of Commerce. 

fThis fair lasts six weeks and is visited by 300,000 people from central 
Asia and Europe. A town of stone consisting of 5,000 shops or bazars laid 
out in streets has been erected for this fair. Special goods are sold in cer- 
tain quarters of the town, thus in the Persian quarter carpets, rugs, shawls 
and silks are sold; in another tea; another, skins and furs, and in another 
metallic wares. The sales foot up annually about twenty million pounds 
sterling. 



NORMAN CONQUEST. 85 

spent their time in war and the chase. '"^Eed deer and wild 
swine were of higher value in the eyes of such men than the lives 
of Saxon Serfs.^^ Henry I^ in 1110^ endeavored to encourage 
Norman homc manufacture by establishing a colony of 

Conquest, 1066 Flemish weavers in London^ and gave them many 
privileges^ but displayed his characteristic igno- 
rance by condemning all foreign w^ool to be burnt. Then came 
the crusades, in which the zealous Richard I took a prominent 
part, w^ith the result that Eastern commodities now came more 
freely into western Europe. Gold, spices and frankincense from 
Arabia; precious stones from Egypt; purple cloth from India; 
palm oil from Bagdad and w^eapons from south Russia and the 
Baltic Sea were introduced into England, and trade began to 
show evidences of steady growth. Then came the Great Charter, 
wrested from the miserable King John, in w^hich were clauses 
favorable to commerce, guaranteeing merchants against exces- 
sive taxation and establishing a uniform system of weights and 
measures throughout the kingdom. During all this time En- 
glish wool was the chief basis of wealth. The considerable 
amount which the English exported shows its relative value to 
other products, and at the same time indicates the insignificance 
of their manufactures. Only the coarsest cloths were made at 
home. Most of this wool went to the looms of Flanders, where a 
superior quality of fabrics was made and supplied to England 
English Wool ^^^ ^^^ parts of Europe. Thus England as a source 
Banishment of supply for the raw product and Flanders as a 
o Jews great manufacturing country were interdependent 

commercially, and this tended to make them so politically, so 
that when Edward I, in 1297, wished to attack France, he first 
made sure of the friendship and support of Flanders, and later 
sovereigns pursued the same policy. Edward I recognized the 
value of commerce chiefly as a means of revenue, and for this 
reason aimed to foster it by opening English ports to the mer- 
chants of Germany, France, Portugal and Spain. As a further 



86 HISTORY OF COMMERCE. 

measure for enriching his exhausted treasury and relieving 
himself of enormous debts^ while displaying his religious intol- 
erance and bigotry^ he confiscated the property of sixteen thou- 
sand five hundred industrious Jews whom he banished from his 
Kingdom.* 

Edward III offered special privileges to the weavers and 
dyers of Flanders who would settle in his realms^ yet fettered 
the grant with absurd regulations in order to prevent his invited 
guests from becoming too rich. During his reign a citizen of 
London^ is said to have been executed for using coal as fuel 
contrary to law. The opposition to coal was based chiefly on 

the fact that at that time chimneys were luxuries 
1326^^77 ^^^ commonly enjoyed^, and the smoke from the 

fires had to escape by the cracks and crevices of the 
houses. Glass windows were about as rare as chimneys at that 
period. 

Up to the fifteenth century England had depended almost 
wholly upon foreign ships to carry away her exports and bring 
her the products of the outside world. This carrying trade 
was mostly in the hands of the merchants of the Italian cities 
(Genoa and Venice) and the Hansa towns^ whose fleets^ consisting 
of many vessels^, laden with wool^ cotton^ silks^ velvets and 
spices^ were eagerly looked for along the English coast. But as 
the English learned the advantages of manufacturing from 
FlanderS;, so they learned the art of navigation from these for- 
Deveiopment ^^S^ merchantmen^ and gradually began to embark 
of the Carrying in the busiucss of forcigu commerce. This was 

vigorously opposed by the Hansa towns^ who 
wished to have no participators in the profits of a lucrative mo- 
noply, and conflicts at sea were frequent and exceedingly har- 



♦This banishment occurred Nov. 1, 1290. Edward's excuse for the decree 
was that the Jews were clippers of the coin of the realm, but his real 
reason was to confiscate their property. Their banishment was a severe 
])low to the industrial welfare of the Kingdom. Jews were not permitted 
to return or re-enter England again until the time of Cromwell. 



CARRYING TRADE. 



87 



assing. But in the course of time English ships became more 
numerous and went farther abroad^ until the Hansa found that 
English commerce could not be stifled^ and the visits of Italian 
ships became less frequent and profitable^ until they finally 
ceased in 1587. Thus about the time the New World was 
discovered England was expanding in its commerce and manu- 
factures^ and preparing to take its place along with Spain^ 
Portugal and the Netherlands;, as one of the leading nations. It 
was far behind these^ however, in point of discoveries in the 
Western Hemisphere, but was destined at a later period to far 
surpass them in colonial possessions. Under Henry VII English 
commerce was placed upon a firm and permanent footing. 
Eecognizing the necessity for a naval power to protect his 
merchant shipping, he built a fleet of war ships, called the 
English Com- Great Harry, which was the beginning of that 
lish^ed under' ii^vy which defeated the Invincible Armada in 
Henry VII the rcigu of Quecu Elizabeth, and has given En- 

gland its supremacy on the ocean even to the present time. As 
soon as England was able to protect her merchant ships, piracy 
declined, her flag became respected and her commerce increased. 
Henry VII, after the discovery of the New World, empowered 
the Cabots to undertake voyages of discovery, and it is under the 
right of discoveries made by these men that England claims, at 
the present time, a large part of British North America. 

Henry VIII abolished the monasteries and set up the Church 
of England. Up to that time the church owned and controlled 
about one-fifth of all the valuable land in the realm, and upon 
the dissolution of the monasteries these lands were divided and 
distributed, thereby greatly improving and encour- 
MonasTedes ^ ^o^^g agriculture, and this in turn tended to im- 
prove manufactures. Sheep were bred in large 
numbers and more wool was produced. As the natural resources 
of the country were developed and utilized, the means of ex- 
change were improved and commerce extended. Indian spices, 



88 HISTORY OF COMMERCE. 

Turkish carpets^ gums^ drugs and ivory were sought in the 
Mediterranean and Eastern ports. English ships went on voy- 
ages requiring a year or more for their completion^ and London, 
Southampton and Bristol carried on trade with distant parts of 
the world in English ships. 

But it was Elizabeth, the daughter and successor of Henry 
VIII, who promoted British commerce most effectually. This 
remarkable woman was ambitious that England should rival 
Spain as the leading power of the world, and to this end she 
legislated often arbitrarily, and frequently for the moment and 
not for time, but yet with the single purpose always in view of 
building up England^s power and resources. During her reign 
agriculture and the mechanic arts underwent great improve- 
ments, and crops were at times so abundant that wheat was 
Q^ggjj exported. Hemp and flax were successfully cul- 

Eiizabeth tivatcd. Manufactures greatly improved, and the 

^55 -^ 3 weaving of woolen cloth received a fresh impetus 

by the arrival of a large colony of weavers from the Netherlands 
who had been driven out by the religious persecutions of Philip 
II of Spain. When the Invincible Armada attacked the English 
navy about three hundred and fifty merchant ships were pressed 
into service for the defense of England, and after the contest 
was over many of the Spanish prizes served to swell the growing 
English navy. Ship-building greatly developed, and the number, 
size and quality of the vessels built underwent a remarkable 
change. 

Elizabeth deprived foreign merchants of their privileges, 
closed the London agency of the Hansa, and finally went to the 
extreme length of forbidding foreign vessels to enter English 
harbors. She granted numerous monopolies to 
PoHcy^^^ ^ encourage home enterprise, and thus between the 

restrictions against foreign ships, and monopolies 
at home, the people were debarred the enjoyment of many useful 
commodities made abroad and compelled to pay dearly for worse 



ELIZABETH^S POLICY/ 89 

articles made at home. Monopolies became so oppres- 
sive, and prices of iron, lead, coal, saltpeter, oil, vinegar, 
starch, yarn, skins, leather and glass were so exorbitant, that 
her subjects finally protested against the system and openly de- 
nounced the laws. The queen wisely yielded to the popular 
demand, thanked the House of Commons for calling her atten- 
tion to the wrong, and changed her policy. 

During Elizabeth^s reign trade and manufactures prospered 
beyond all former periods in English history. The comforts of 
life were multiplied and the style of living among all classes 
greatly improved. Prior to that time the common people lived 
in houses with dirt floors, no pretense being made to sanitation, 
and the streets were so filthy that London and many other 
towns were annually visited during the summer months by an 
epidemic called the ^Tlague.^^ But before the end of Elizabeth's 
reign much of this was changed. Houses began to be built with a 
view to health and comfort. Tasteful furniture came into use, 
displacing the rude arrangements of former times. 
Prosperity ^^^ Wealth asserted its presence among the com- 

mercial classes as well as among royalty and nobili- 
ty. The queen's example encouraged a taste for magnificence in 
apparel. Luxury at table likewise prevailed, and sumptuous 
habits spread from London to every province of the realm. The 
Koyal Exchange, the most notable commercial emporium in En- 
gland, was founded at this time and opened by the queen in per- 
son. The famous East India Company was chartered by Eliza- 
beth in 1600, and thus was laid the foundation of the vast En- 
glish empire in India which reached its fruition in the reign of 
Victoria. This, too, was the Golden Age of literature, and gave 
to the world Shakespeare, Bacon, Spenser, Ben Jonson, and a 
host of others who have enriched the world with productions of 
inestimable value. 

The East India Company chartered by Elizabeth in 1600 
was the beginning of the system of foreign commerce and coIo- 



90 HISTORY OF COMMERCE. 

nization which has grown to such immense proportions, and made 
England the great manufacturing and distributing center which 
she is to-day. This was fashioned after the Dutch 
Company^ East India Company formed about the same time, 

and was given the exclusive right of com- 
merce with all the countries extending from the Cape of Good 
Hope eastward to the Straits of Magellan, "except such coasts 
and islands as might already be occupied by some friendly 
European state.'^ The government of the company was vested 
in a governor and board of directors, varying in number at 
different times and under different statutes. Besides these, 
local councils, having limited authority over particular terri- 
tories, were established in Madras, Bombay and Calcutta. The 
original purpose of the Company was the profits of commerce, 
but in the exercise of its functions it gradually assumed a gov- 
ernmental character. It began as a purely private corporation 
of trading merchants, free from governmental direction, but 
eventually was brought under a "Board of ControF^ appointed 
for India, and subjected to home supervision. 

This company met with wonderful success from the first, 
realizing profits from its voyages and the sale of the products 
of India of fabulous amounts. The Portuguese and Dutch, who 
had previously become thoroughly established in the trade, 
opposed by every possible means the encroach- 
Company ^ ^ mcnts of the English merchants upon Indian ter- 
ritory, but by winning the favor of the Great 
Mogul with bribes and presents, taking advantage of the quar- 
rels among the petty chiefs and siding with the one most likely 
to be successful, the company in time gained a firm footing 
and established agencies and trading posts in various vantage 
points of the empire. The wealth of India was now poured 
into the lap of Britain by ship loads. The profits of the com- 
pany became enormous. Shares of £100 rose in the market to 
£245, £300 and even £500, Luxurious tastes were created by 



EAST INDIA COMPANY. 91 

the introduction of rare commodities. Spices and jewels from 
India were extensively used^ and rare cotton and linen fabrics 
added to the wearing apparel of the rich. As the use of gun- 
powder in war increased;, there arose an increased demand for 
nitre which Europe could not satisfy^, but the supplies from 
India were abundant enough to meet all needs^ and the profits 
were large. 

The success of the East India Company and the enormous 
profits which it was realizing from its royal monopoly excited 
the jealousy of London merchants^, with the result that a rival 
company w^as formed which set at defiance the exclusive privi- 
leges of the authorized company^, and fitted out 
vJithVivais^^ sliips for Indian trade. When caught these were 
treated without mercy as pirates by the East India 
Company. Nevertheless they continued to struggle for a share 
of Indian commerce^ and in 1698 disputed in Parliament the 
renewal of the charter of the original company. The result was^, 
a combination of the two companies under the name of the 
United East India Company^ which for a century held despotic 
sway over England^s commerce in the East. During the first 
half of the seventeenth century the East India Company re- 
tained purely a commercial character^ but being situated far from 
the protection of the home government;, beyond the watchful 
supervision of consuls and ambassadors^ it became necessary that 
the company should be able to defend itself and redress its own 
wrongs. Thus a military character was attached to trading, and 
forts and garrisons were built. 

Owing to the contests between the native princes after the 
Great Mogul dynasty fell, the French in 1750 undertook to 
Conflicts with destroy English power in India, and well nigh 
the French succccded, too, but owiug to the valor of Lord 

Clive, formerly a clerk in the company's office at 
Madras, the French were defeated, the native princes made vas- 
sals, and a large part of Indian territory brought under English 



92 HISTORY OF COMMERCE. 

control. From that time until Napoleon there were more or less 
of conflicts in India between the English and French^ with 
odds in favor of the former. In 1767 Parliament decided to 
claim a share in the government of the territory thus acquired^ 
and appointed Warren Hastings first governor-general. Under 
his administration and those of his successors extensive ad- 
ditions were made to English territory during the next fifty 
years. Meanwhile the power and commercial supremacy of the 
United East India Company declined. Its servants committed 
the greatest extravagances and frequently returned home to 
England with immense fortunes^ while the company itself was 
frequently in financial difficulties. In 1813 Indian trade was 
by act of Parliament thrown open to private enterprise, and in 
1833 the Company was compelled to abandon entirely its trading 
character. Its functions continued politically until the Great 
Mutiny of 1857 gave it the death blow. In 1858 Queen 
Victoria, by proclamation to the native chiefs and princes, took 
over the government of India, and in 1877 she formally assumed 
the title of Empress of India. 



CHAPTER X. 

COMMERCE OF ENGLAND— Continued. 

MANUFACTURING; POSTAL SYSTEM; BANKING; SPECULATION; 
COLONIAL POLICY. 

From exporting her wool and importing her manufactures 
as England had done during the Middle Ages, she had in the 
seventeenth century risen to the position of a manufacturing 
nation, sending large quantities of cloth, metals and eastern 
products brought first to England, to her colonies and to the 
lands along the Baltic and Mediterranean. Thus we see her 
England as a importing the products of Turkey and India or 
Nation^^Navu ^^^ ^^^ ^^ ^^^^ Foundlaud and re-shipping them 
gation Acts to France, Eussia, Spain and Italy. Her trade in 

woolens with the Netherlands continued in a prosperous con- 
dition while her colonial trade developed rapidly. The carrying 
trade was yet largely in the hands of the Dutch, and in order 
to stimulate English ship-building so as to handle this trade 
herself, and cripple the Dutch, Cromwell in 1651 had laws 
enacted, called the Navigation Acts, by which vessels built in 
England or a British colony alone could be employed in the 
importation of goods into England from the three continents 
of Asia, Africa and America, while European merchantmen could 
introduce into British ports only the produce of the nations to 
which they belonged. English ownership of vessels engaged 
in foreign trade thus became a necessity, and the officers and at 
least two-thirds the crew were required to be native born. 
These laws continued in force until 1825 and no doubt gave 
a great impetus to shipping, enabling England to gradually 
obtain control of much of the carrying trade of the "world, an 
acquisition which she has continued to hold up to the present 
time. 



94 HISTORY OF COMMERCE. 

Under CromwelPs wonderful energy affairs improved. War 
ceased and prosperity for a time became more general than it 
had been for two generations before. Agriculture continued to 
improve and manufactures advanced. The manufacture of cotton 
goods had its inception about this time. A cheap and efficient 

postal service was established under government 
Post!" System coutrol and security^ thus greatly facilitating trade 

and industry. Prior to this time many modes of 
conveying letters had been in vogue^ but Cromwell^ by the Act 
of 1656^ organized a postal department of the government^ 
appointed a postmaster-general and established a system of 
post-roads throughout the realm. Thereafter the occupation of 
carrying the mails was forbidden to private individuals. One 
object of the act was to discover and prevent wicked and danger- 
ous designs against the government^ by exercising a censorship 
over the mails. Home and foreign commerce steadily advanced. 
As manufacturing and ship building increased^ foreign markets 
were sought and found for English products. The commerce 
of the Netherlands was now on the decline^ partly owing to the 
persecutions of the Spanish king and partly as the effect of the 
I^avigation Acts. Germany, another competitor of England, 
Progress ot ^^'^^ Severely injured by the Thirty-years' war 

English (1619-1648), and with these two competitors 

practically out of the race, English commerce went 
forward with increasing vigor and facility. Immigration from 
the Flemish manufacturing centers was encouraged, and thou- 
sands of weavers and dyers came to England bringing their 
skill and sober habits, as an addition to the wealth of the realm. 
At about this time also, Louis XIV of France committed his 
egregious mistake — which cost his country so much and bene- 
fited England accordingly — of expelling the Huguenots or 
French Protestants, by the revocation of the Edict of Nantes 
(16(S5) and 50,000 of his most skillful artisans went over to 
England, carrying with them an accumulated capital of not less 



BANKING SYSTEM. 95 

than £3,000,000. These gave a new impetus to the manufact- 
uring interests of Britain, and greatly benefited, especially the 
silk, glass, paper and hardware trades. From the teaching of 
these exiles the quality of English manufactures showed a marked 
improvement, and tissues of silk, wool and linen soon attained a 
high degree of perfection. Irish linen from home grown flax 
attained a world wide renown from this period. 

It had been customary for London merchants to deposit 
their funds with the mint for safe-keeping, but Charles I 
seized their funds as a forced loan, and thus not only destroyed 
the government credit but, by the same act, put an end to the 
custom. City goldsmiths of high repute were next entrusted 
Origin of the ^^^^ Valuable deposits, and they paid the mer- 
Banking chauts interest and issued a form of negotiable 

ystem receipt, similar in effect to our bank notes. These 

goldsmiths were money lenders and made advances to the gov- 
ernment in times of need, taking as security mortgages on future 
revenues. They advanced to Charles II the sum of £1,300,000, 
at eight or ten per cent, interest, upon the security of the taxes. 
Charles in 1672 refused to repay the loan, saying they must be 
content with the interest, and this caused widespread panic and 
financial disaster. William Paterson, a Scotchman, then came 
forward and offered to provide the government with £12,000,000, 
to be repaid by taxes on beer and other liquors. The outgrowth 
of the whole matter was the establishment in 1694 of the Bank 
of England, an institution which has been a powerful element 
in the commercial progress and greatness of England, as well as 
a balance-wheel to the world of finance. After the great bank 
was established the business of banking became an avowed prac- 
tice, and men who could inspire confidence by their character 
and wealth became bankers and found the pursuit lucrative. 

At about the time John Law was promoting his Mississippi 
scheme of reckless speculation in France the English were 
launching a similar wild project of the most visionary character, 



96 HISTORY OF COMMERCE. 

now known as the South Sea Bubble. By this scheme they pro- 
posed to pay off the national debt and all grow rich at a stroke. 
The shares of the East India Company were at a high premium 

and the Bank of England promised wonders^ why 
Bubble"* ^^ ^^^ ^^^ §^^ ^^^^ ^^ stocks? Johu Blouut^ dircctor 

of an insolvent company trading in the South Seas, 
from which not a penny of a dividend had been collected in ten 
years, persuaded an easy ministry that he could wipe out the 
national debt if granted an exclusive charter to the rich gold 
mines yet undiscovered in the lands of the South Seas and all 
the teeming fisheries which might exist there. Parliament made 
the grant, and the directors began selling stock. The premium 
went higher and higher until it reached more than 1,000 per 
cent. Eich and poor alike embarked their means in the confi- 
dent assurance of making a fortune. Shrewd bankers accepted 
the stock as collateral for loans which ordinarily they would not 
have considered. Hundreds of visionary companies were formed 
and worthless stocks were floated to the amount of over £500,- 
000,000 — more than all the gold and silver in the world, and 
exceeding several times the value of the landed property of 
England. The bubble burst in 1720.* Bankers and goldsmiths 
failed, dragging down thousands with them. Many opulent 
families were brought to beggary and untold misery resulted 
among the poor. Like every other scheme the object of which 
is the making of something out of nothing, the South Sea Bubble 
exploded and left widespread ruin. So clamorous were the peo- 
ple for some satisfaction for their losses that Parliament was 
obliged to interfere, and not only distribute the meager assets 
of the company among its victims but punish the offenders. 
Several of the directors were imprisoned, and all were fined 
to an amount aggregating several million pounds. 

While the events previously enumerated were transpiring at 



*The pin that pricked the bubble was the discovery that Sir John Blount 
and other promoters of the scheme had quietly disposed of their stock. 



COLONIAL POLICY. 97 

home^ England was developing a colonial empire of large pro- 
portions in America. Had her statesmen pursued the same 
liberal and enlightened policy towards her American Colonies at 
that time which characterizes her present system of colonial 

government^ she might have continued to hold and 
Colonial Policy control her American possessions indefinitely, but 

instead she proceeded upon the false theory that 
her colonies were proper subjects to be governed and exploited 
for the benefit of the mother country — a theory which has been 
steadily pursued by Spain up to the present time, resulting in the 
loss of almost all of her colonial possessions. All imports to 
the colonies from any other country in Europe were forbidden 
in order to give English manufacturers a monopoly of the Ameri- 
can trade. Then in 1660 an act was passed prohibiting the 
colonies from exporting certain enumerated articles to foreign 
countries without being first brought to England and there 
unladen and then re-shipped by English merchants. The 
enumerated articles were tobacco, sugar, corn, iron, molasses, 
ginger, cotton, indigo, coffee, skins and lumber — just the com- 
modities which the American and West Indian colonies produced 
in most abundance. 

The colonists were not only compelled to sell their surplus 
products through English merchants and send them in English 
vessels, but they were equally forced to buy all imported goods 
from England. An act was passed in 1663 prohibiting any 
article from being sent into the colonies except the same was 
sent from an English port and in an English ship. Home manu- 
factures among the colonies were discouraged and suppressed. 
Woolen manufactures were forbidden in 1719 and iron in 1750. 
Colonial hatters were not allowed to send hats from one colony 
to another. Thus the colonists were hampered and forced to pay 
unjust tribute to home ships and merchants. This unfair and 
narrow-minded policy caused much discontent and irritation 
among the Americans, and was openly and ably opposed by an 



98 HISTORY OF COMMERCE. 

element in Parliament headed by the great statesman William 
Pitt;, but without result. Finally the culmination came on the 
celebrated occasion when the citizens of Boston emptied a ship- 
load of East Indian tea into their harbor, and war was openly 
declared and begun in 1775. 

We have now reached a period in history celebrated for social, 
political and industrial revolutions. During the last quarter of 
the eighteenth century the human mind seems to have awakened 
to a new development and realization of its possibilities. The 

principles of republican government were enun- 
Revoiutk)ns ciatcd by the American colonists in 1775, and their 

war of independence fought to a successful issue 
in 1783. The doctrine that the power of the state resided in the 
people and not in the sovereign was the seed which, transplanted 
to French soil, ripened into the great social and political revolu- 
tion of France in 1789. In England during this period a mighty 
though silent, industrial revolution was going on, occasioned by 
the invention of improved machinery and the introduction of 
steam power. Prior to this time nearly all of the manufacturing 
in England, as well as other countries, had been done by hand 
in the homes or little shops of the workmen, aided by their 
families and apprentices. The methods were crude, tedious and 
difficult, causing manufactured goods to be both imperfect and 
expensive. A series of useful inventions following closely upon 
each other changed all this, increased the power of production 
in mining, manufacturing and agriculture a hundredfold or 
more, and made England the richest nation in the world. 

Henceforth by the use of labor-saving machinery men were 
able to produce not only better wares and of more uniform 

quality, but in far greater quantities in proportion 
System^ °^^ to the labor employed, and hence much cheaper 

in cost. But in order to utilize this machinery 
it became necessary that workmen should congregate, and thus 
the introduction of machinery brought about the factory sys- 



FACTORY SYSTEM. 99 

tern. Costly and intricate machines as well as buildings in which 
to conduct the work were necessary. This required the amassing 
of capital — a new feature of the industrial problem. At first 
factories were located near streams where water power could be 
obtained, but with the advent of the steam engine they could be 
located near towns where there was an abundant labor supply, 
and as the means of transportation improved, less regard need 
be had for the location of the raw product. The introduction 
of the factory system marked an era in the industrial progress 
of England and the world, and the bringing of workmen together 
and into more intimate association with each other had a radical 
influence upon them intellectually. 

Chief among the inventions which brought about this indus- 
trial revolution was the steam engine of James Watt, who took 
out his patent in 1769. This was preceded in 1767 by the spin- 
ning jenny invented by James Hargreaves, whereby many threads 
could be spun at once instead of a single thread as heretofore, 
and this to be followed later with improvements in the methods 
of spinning and weaving wool and cotton by Arkwright, Cromp- 
ton, Cartwright and others. These inventions completely revo- 
lutionized the manufacture of cotton and woolen goods, and 
these industries went forward with a bound. Manchester at- 
tained great importance on account of the magnitude of its 
factories. Liverpool, hitherto a straggling fishing town, became 
a leading city, importing large quantities of raw cotton and ex- 
porting the finished goods. Silk manufacture was similarly 
promoted. The construction of machinery necessitated the use 

of coal and gave a new impetus to mining, while 
Inventions ^^^ ^^^^ ^^ ^^^ stcam engine enabled the miners to 

pump the water out of the mines — a thing which 
they had not been able to do by means of the crude hand pumps 
formerly used. Processes of smelting and developing ore, and 
the manufacture of steel were greatly improved. Birmingham 
and Shefiield date their vast hardware and cutlery trade from 



100 HISTORY OF COMMERCE. 

the invention of the puddling furnace by Cort in 1783^ whereby 
wrought iron was produced by the use of the coal found in close 
proximity to both the ore and the limestone which is used as a 
flux. By means of this invention immense quantities of ore were 
utilized which would otherwise have been worthless. 

Following closely upon the inventions enumerated above 
came the Napoleonic wars^ which engaged the most of the con- 
tinent and threw a large share of European commerce into 
English hands. At a prodigious cost immense armies were 
Commerce kept in the field against France^ and to supply the 

Napofeonic wauts of thcsc required the employment of an in- 

Wars dustrial army at home. England had the advan- 

tage that^ while being a participator in the war^ her fields and 
cities were not devastated nor her territory invaded by the 
armies. Prices were high and English goods in great demand. 
Thus the period of war was a commercial advantage to England. 
Meanwhile the development of the industries resulted in a 
great improvement in the means of transit and commerce through- 
out Britain. Goods manufactured must be sold and transported, 
and better means of carrying were needed. Paths for pack- 
horses were converted into wagon and cart roads, canals were 
built, rivers cleared and utilized, and the way thus paved for the 
introduction of steam power to locomotion a little later. 

After the fall of Napoleon and the restoration of peace 
throughout Europe in 1815, there came a period of reaction and 
commercial depression in England which lasted ten years. This 
was caused chiefly by the efforts of continental nations to revive 
their own shattered industries by means of severe protective 
tariff's, which practically shut out English manufactures. A 
After the scrics of bad harvests coming about the same time, 

y^^°s^°^^^ together with the high taxes incident to the war, 

i8i5toi825 placed the country in a severe strait. The distress 

w^as aggravated by the so-called "Corn Laws,^^ which were en- 
acted as a means of relief to the farmers, and provided that no 



COLONIAL POSSESSIONS. lOl 

corn should be imported unless the price was 80s a quarter.* 
The result was expensive bread for the working classes^ and the 
many substitutes resorted to for bread raised the price of other 
foods. Riots and public meetings were held among the mining 
and manufacturing districts throughout the whole of England. 
The period of greatest distress was from 1817 to 1819^ and 
during that time the strong arm of the government was neces- 
sary to maintain peace and order. In 1819 came a severe 
financial panic^ and in the single year no less than 3^5e52 bank- 
ruptcies occurred in England alone. Gradually an improvement 
came. The Bank of England resumed specie payment in 1821. 
Injurious laws and restrictions were modified^, business with the 
colonies increased and commerce revived. 

During this period of war and commercial depression at 
home England was growing rich in colonial possessions abroad. 
She not only defeated the French in India as previously stated, 
and extended her holdings in that direction, but acquired Ma- 
lacca, Ceylon (1796) and the Cape of Good Hope (1806), besides 
Australia and many minor dependencies. Captain Cook had 
discovered New Zealand in 1769, and by his advice in 1788 a 
shipload of convicts were sent out and Sidney was founded as a 
Growth of penal colony. A few sheep were carried thither in 

Colonial 1797, and the fine pastures proved wonderfully 

adapted to their rearing. The wool was of such 
excellent quality that this, together with gold, subsequently 
made Australia one of England^s richest and most important 
colonies. 

The period of 1825 to 1850 may be said to mark the tran- 
sition stage from protection to free trade in England's com- 
mercial policy. Prior to this time more or less severe restric- 
tions had been placed upon manufacturing, agriculture and com- 
merce. Numerous monopolies had been granted, as in the case 

*A quarter equals 8.252 bushels in our measure and 80s per quarter 
would be equivalent to about $2,36 per bushel. 



102 HISTORY OF COMMERCE. 

of the Hudson Bay and East India Companies. The Navigation 
xlcts passed in 1651 continued in force^ and every commodity, 
raw and manufactured, was fettered with customs or excise 
duties. A radical change in England^s policy, requiring twenty- 
five years for its consummation, was now to take place. In 
The Change 1820 a Company of London merchants sent up a 

tio^toFree^" petition to Parliament, praying that all duties ex- 
Trade cept for purposes of revenue might at once be 
repealed. A similar petition came from the Chamber of Com- 
merce of Edinburgh. Parliament appointed a committee to in- 
vestigate the question, and the report of the committee was 
unanimously in favor of granting the relief asked. The Naviga- 
tion Acts were at once modified and their severity relaxed. The 
duties on raw silk and wool were reduced despite the opposition 
of the wool growers. A Reciprocity Bill was introduced by 
Mr. Huskisson, President of the London Board of Trade, and 
passed by Parliament, giving foreign ships equal advantages in 
England to those accorded English ships trading in foreign 
ports. For a period of nearly twenty-five years the pendulum 
of public sentiment was swinging in the direction of free trade, 
but it was not until 1849 that the Navigation Acts were entirely 
repealed, the Corn Laws abolished, and England had committed 
herself unreservedly to the policy of free trade. 

Meanwhile the mighty impulse given to the iron trade and 
the application of steam to transportation by land and water 
were developing commerce and the industries to a still greater 
degree. Fulton had demonstrated the use of steam for the pro- 
pulsion of ships in 1807, and in 1838 the first steamship. The 
Great Western, crossed the Atlantic. The voyage to America 
Application which had hitherto required five or six weeks was 

of Steam to now suddculy reduced to a little more than a 

Transportation ^ygg]^^ rpj^^ British fleet of merchant vessels in- 
creased to twelve or fourteen times its size of thirty years be- 
fore, and under free trade, England became the focus for ships- 



STEAM POWER. 103 

of other nations bearing the products of nature and art from 
every clime, and returning, radiated from the same ports 
freighted with English manufactures for world-wide use. The 
invention of the telegraph in 1846 was another great step in 
advance, and with the penny post the means of communication 
became so improved that supply and dem.and were regulated, 
extensive fluctuations in prices avoided, and a steady and healthy 
commerce promoted. The discovery of gold in Australia in 1851 
led to extensive emigation to that colony, vastly increasing 
the colonial trade of England. Within ten years gold was 
sent to the mother country to the amount of £100,000,000. 
This influx of the precious metal by cheapening money raised 
prices of commodities generally, and thus stimulated production. 
The opening of the Suez Canal in 1869 afforded a shorter and 
quicker route to the East, and led to an extension of commerce 
with India, China, Australia and the East Indies. 
Possessions '^^^ culture of cottou was introduced into Aus- 

tralia, and given a great impetus in 1861-1865 by 
the scarcity of the American fiber, occasioned by the war of the 
Eebellion which blockaded American ports, and soon Australian 
cotton rivaled in quality the celebrated "Sea Island^^ growth. 
Besides copper, tin, iron, wine and wheat, wool also came from 
Australia in large quantities. From India and Ceylon came 
cotton, indigo, jute, rice, wheat, horns, hides, tea and coffee. 
Thus England^s eastern possessions continued to expand, while 
roads, canals, railroads and telegraph lines were constructed 
throughout those colonies. 

The English acquired the Cape of Good Hope (called Cape 
Colony) from the Dutch in 1806. North of this colony were the 
independent states of the Transvaal Republic and the Orange 
Free State, still occujued by Dutch Boers. These settlers, who 
kept up a close intercourse with Holland, were engaged prin- 
cipally in the rearing of sheep and the production of wool, 
which latter was their chief export. Natal, a newer British de- 



104 HISTORY OF COMMERCE. 

pendency than Cape Colony^ was of growing importance and 
produced arrowroot and sugar in considerable quantities. En- 
gland exported to her South African possessions 
South Africa apparcl^ fumiturc^ cloths^ iron^ hardware, leather 
and machinery, and in turn received from them 
diamonds, gold, ivory, feathers and wool. The extensive dia- 
mond fields proved a great attraction, as the supply of the 
precious stones was said to be inexhaustible, and the Boers were 
gradually pressed back. In order to secure more Boer terri- 
tory, a mock contest was gotten up between a native chief and 
the Boers, and by misrepresentation to the Boers a British 
referee was actually appointed to decide the dispute. The decis- 
ion was adverse to the Boers and the territory was immediately 
ceded to the English. Friction between the English and Dutch 
continued, until finally in 1899 open warfare was begun, result- 
ing in a conflict lasting nearly three years. At fearful cost of 
men and supplies, England subdued her antagonist and annexed 
the territory of the Boer republics to the British Crown, the one 
under the name of the Transvaal Colony and the other as the 
Orange Eiver Colony. 

The heavy draft upon the English treasury occasioned by 
the South African war; the decline in the shipping interests of 
the United Kingdom and the sale of several large steamship 
lines to American capitalists; the severe decline in the acreage 
of wheat in the United Kingdom (from 3,750,000 acres in 1872 
to 2,000,000 in 1902), with similar decline in the acreage of 
corn, together with the fact that Germany, France and the 
England's United States have entered the field of manu- 

Commerciai facturc as scvcrc Competitors of England, and have 

Condition evcu sccurcd important English contracts in steel 

construction, have given rise to serious doubts whether the United 
Kingdom will continue to lead the commerce of the world. The 
overwhelming balance of trade between England and the United 
States is now against England, and if this should continue for 



RECENT COMMERCE. 105 

a series of years, America, instead of being a debtor, would then 
become a creditor nation, our dividends and interest would re- 
main at home instead of going to England, and the financial 
center of the world, now in London, would again move to the 
westward. 



CHAPTER XI. 

COMMERCE OF THE UNITED STATES. 
COLONIAL PERIOD; FINANCIAL POLICY; WAR OP 1812. 

By the treaty of Paris in 1783^ the American Colonies secured 
their independence and became the owners of a domain embrac- 
ing 1^400 miles of sea coast and consisting of 827^,844 square 
miles of rich and productive land. The natural resources of 
this vast domain embraced every species of raw product^ animal, 
vegetable and mineral, which might be needful in the growth 
and upbuilding of a nation in the arts of agri- 
thTcoronfes" culturc, manufacture and commerce. At that time 
the great majority of the population lived on 
farms, but three and one-third per cent, having their homes in 
the towns and cities, and there were but six cities having a 
population of over 8,000. Naturally the energies of the people 
were devoted to the utilization of the natural products of the 
soil and forests. Shipbuilding early became an important in- 
dustry, owing to the abundance of excellent timber along the 
coast and rivers, and this led to the development of the fishing 
industry. New England ships were made in great numbers, 
and were largely engaged in whaling and in the cod fisheries 
of that coast. Dried codfish was used as money in the Massa- 
chusetts Colony at one time, and was one of the chief sources 
of wealth of that colony. Whatever of foreign commerce ex- 
isted was carried on chiefly with the mother country. The 
northern colonies exported timber in the form of shingles and 
ship timber; and the southern colonies, tobacco, tar, turpentine, 
rice and cotton. 

Several of the colonies made early attempts at the manufact- 
ure of woolen, linen and cotton goods for home consumption, 

106 



UNDER THE CONFEDERATION. 107 

but England regarded all such displays of colonial enterprise 
with a jealous eye. She wanted no rival manufactories in her 
colonies. It had been the uniform policy of Spain and Portugal 
to use their colonies for their sole benefit^ and England fell 
into the same error. The English idea was that the colonies 
should produce only what England needed, should sell to 
England only, and in return buy what England had to sell. 
Accordingly, when the Americans began to make woolen goods 
to the extent of diminishing the demand for English woolens, 
Prohibition of they wcrc promptly forbidden to export wool or 
Manufactures woolcu goods from ouc colouy to another. When 
1650 they turned their attention to the production of 

hats they met a like prohibition against the exportation of hats 
from colony to colony, and the number of hatter apprentices 
was limited by law. When they made an attempt to smelt a 
small quantity of iron ore, for their daily needs, a statute was 
passed which permitted the importation of pig iron into En- 
gland duty free, but forbade the erection of ^^any mill for slitting 
or rolling iron, or any planting forge to work with a tilt-hammer, 
or any furnace for making steel.^' During the decade of 1760 
to 1770, wonderful improvements were made by Hargreaves 
and Arkwright in machinery for spinning and weaving, and the 
colonists made great efforts to secure some of these machines, but 
the legislation of England prohibited the exportation of ma- 
chines, tools, plans, and even the immigration of any one who 
knew how the- machines were made. By these means, together 
with the navigation laws forbidding trade with England, includ- 
ing English Colonies, except in English ships, she made it ex- 
ceedingly difficult for the colonists to supply themselves with 
even the coarsest articles of everyday use. 

The strained relations between the colonists and the mother 
country became more aggravated, and the tie which had bound 
them together for a hundred and fifty years was broken by open 
hostilities in 1775. The American Eevolution was carried 



108 HISTORY OP COMMERCE. 

through to a successful issue, but peace did not bring prosperity. 
The war had shattered business, sapped the brawn of the country, 
The Colonies ^^^ thrown the statcs heavily into debt. The 
under the Confederation proved weak and ineffectual. It had 

one eration ^^ power to enforce its determinations, carry out 
its agreements or redress its injuries. In the treaty of Paris it 
was promised that Congress should ^^use its influence'' to secure 
the payment of private debts due to Englishmen. But it turned 
out that Congress had no influence and the debts were never 
paid. In consequence the British refused to give up some of 
the military posts on the western frontier. American ships 
were captured or plundered by the Barbary pirates with im- 
punity, the new republic being powerless to fight them. 

In order to prosecute the war of the revolution. Congress 
issued bills of credit, which were to pass as money. This con- 
tinental currency at first was taken readily, but as million 
after million was printed and the credit of the Congress ap- 
peared more and more doubtful, its value declined, and at last 
it grew so cheap that ^'^not worth a continental" became a by- 
word to express utter worthlessness. During the summer of 
1780 the currency became so depreciated that it required ten 
dollars of the paper to make one cent. Prices rose until corn 
sold in Boston at $150 per bushel and flour $1,575 per barrel. 

Samuel Adams is said to have paid $2,000 in paper 
Mcmey*"*^* money for a suit of clothes, and Washington to 

have remarked that it required a wagon load of 
money to buy a wagon load of provisions. The people of Ehode 
Island thought they had hit upon a solution of the trouble, and 
issued a legal tender paper currency. Any farmer could borrow 
this from the public treasury upon security of one-half the 
appraised value of his land. Nevertheless the currency de- 
preciated, and all their efforts to keep it at par proved futile. 
In Massachusetts riots broke out in opposition to the efforts of 
creditors to collect their debts, and discontent and lawlessness 
were rife. 



UNITED STATES BANK. 109 

To add to the unfortunate situation the states became in- 
volved in quarrels with each other. Having the right to levy 
duties on imports^, they set out to compete with each other for 
foreign commerce — the one building up its trade at the expense 
of another. They went a step farther and laid taxes on goods 
imported from^ neighboring states. New York laid a duty on 
Quarrels imports from New Jersey and Connecticut. New 

between the Jersey retaliated by taxing the New York light- 
house on Sandy Hook. New Hampshire quarreled 
with New York over claims^ and Pennsylvania and Connecticut 
wrangled over land in the Wyoming valley. The whole state of 
affairs demonstrated the imbecility of the government^ and the 
country was steadily drifting into hopeless bankruptcy and 
anarchy^ when in 1787 a convention met in Philadelphia to 
form our present constitution^ which went into effect March 4^ 
1789. 

With the organization of stable government came a revival 
in business. Commerce and manufactures began to thrive and 
expand as soon as men could begin to depend on the future. 
General distrust and uncertainty gave place to confidence and 
faith in the future of the new republic. Trade between the 
states was no longer hampered by troublesome tariffs^ and 
bickerings ceased. The federal government was able to collect 
its revenues and its obligations were promptly met. 
Constitution^ Hamilton as Secretary of the Treasury formulated 
a financial system which bred confidence and cre- 
ated a national credit. Capital began to move in the develop- 
ment of the resources of the country^ manufactures began to 
expand^ and commerce redoubled its activity. The federal gov- 
ernment assumed the debts of the states^ and the holders of 
continental script suddenly awoke to find that the paper which 
they had considered of doubtful value was genuine wealth. 

Hamilton recommended the establishment of a bank of 
the United States, with branches in the principal cities. The 



110 HISTORY OF COMMERCE. 

capital of the bank was to be $10,000,000, and the federal gov- 
ernment was to own one-fifth of the stock and appoint one-fifth 
of the directors. The bank was to be a depository of government 
money, issue paper currency payable in gold or silver and receiv- 
able for all dues to the United States, and transact a general 
banking business. The proposition aroused the fierce objections 
of those who feared the results of associating government with 
banking, and the objection was at once set up that 
sra^t^Ba^nk ^^^ Constitution gave Congress no specific au- 
thority to organize a bank. Hamilton then laid 
down the doctrine of ^^implied powers,'^ claiming that Congress 
could by implication do anything ^^necessary and proper'' to 
carry into effect its express powers, and that a bank was such an 
agency for the conduct of the finances of the government. This 
was the beginning of the ^^loose construction'' and ^^strict con- 
struction" theories held by the opposite political parties to the 
present time. The bank bill w^as passed and President Washing- 
ton signed it, creating the United States Bank with a charter for 
twenty years — 1791-1811. The bank served as a balance-wheel 
to our financial system, and as a manufactory of credit, by giving 
stability and definiteness to the currency, and enabling the 
people to economize the use of capital. Branches were estab- 
lished in New York, Boston and six other cities, the parent 
bank being at Philadelphia. Secretary Gallatin strongly recom- 
mended the renewal of its charter in 1811, but after a vigorous 
debate on the question Congress voted it down. 

Hamilton's next important measure was the establishment of 
a national mint. The coins in use throughout the states were a 
mixture of English, French and Spanish, gold, silver and cop- 
per of various denominations, weights and values. The English 
system of pounds, shillings and pence had been the standard 
money of the country. To Thomas Jefferson is due the credit for 
the adoption of a uniform decimal scale, with the dollar as the 
unit. Jefferson's mint bill followed closely after this reform, 



FOREIGN TRADE. Ill 

and reduced the metal currency of the country to a uniform 
system of coins. The double standard of gold and silver was 
adopted^ with a ratio of fifteen ounces of silver to one of gold. 
Establishment '^^^ latter being then the dearer metal at that ratio, 
of a National the cheaper, silver, drove it out of circulation, and 

silver and paper were the only mediums of circu- 
lation. With the decimal system of coinage and a national 
mintage, the facilities for the computation of values and trans- 
action of business were greatly improved. 

At the time of the adoption of the Constitution the exports 
of all kinds of the new republic amounted to about $20,000,000 
annually. Of this amount a very small portion, probably not 
more than $1,000,000, was manufactured goods, for it must be 
remembered that before the war England had thrown almost 
insurmountable hindrances in the way of the manufacturing 
industries of the colonies. Owing to the scarcity of skilled labor, 
and its consequent high price, together with the low prices pre- 
vailing, the manufactures of the country picked up slowly for 

the first few years after the close of the war, but by 
Tonnage Acts '^'^^^ they began to expand with great rapidity. 

In that year Congress passed a tonnage act, which 
taxed vessels built and owned by the United States six cents a 
ton; those built but not owned in the United States thirty cents 
a ton; and foreign ships fifty cents a ton. The tariff act which 
was passed in the same year discriminated in favor of East 
Indian goods imported direct, as against the same goods 
imported from Europe. Stimulated by these provisions, exports 
and imports rapidly increased, and the American flag went to 
distant parts of the world. New England ships embarked with 
cargoes for the far East or intermediate ports, to bring home 
in return immense quantities of coffee, spices, tea, silk, nankeen 
and other cloths, all of them articles of great value in com- 
parison wdth their bulk, and hence yielding good profits to the 
carrying trade. Portions of these cargoes w^hich did not find a 



112 HISTORY OF COMMERCE. 

ready market at home were re-shipped to Hamburg and other 
European ports. Thus American commerce rapidly expanded, 
and shipbuilding became more active, so that while in 1789 less 
than one-fourth of our ocean traffic was in American vessels, in 
1792 less than one-fourth was in vessels not American. 

An untoward combination of circumstances in Europe arising 
about this time proved a great advantage to American com- 
merce. The French Eevolution was in progress and had moved 
beyond control. Thrones were in danger. France had been 
attacked by Germany in the interest of the "divine right of 
kings.^^ England became involved, and in 1793 declared war 
upon France. The effect of this war was to further stimulate 
American manufactures and shipping. Each of the belligerent 
nations needed the provisions and stores which the Americans 
Effect of the ^^^ stood ready to furnish. Under the colonial 

Napoleonic systcms of England and France commerce with 

^^^^ their colonies was confined to their own ships, 

but the British navy swept French merchantmen from the seas 
and visa versa, and hence the colony of Louisiana could render 
France no help in the form of supplies. The French govern- 
ment therefore threw open French ports to American vessels. 
The sugar of the West Indies, the coffee and hides of South 
America, and the provisions of America were thus carried se- 
curely into France, thus greatly increasing our foreign com- 
merce. 

The Middle and Southern states had, as colonies, long been 
raisers of cotton, but very little of this useful fiber had been 
exported until after the adoption of the Constitution, owing 
chiefly to the difficulty of separating the seed from the fiber. 

This process has been accomplished by slow and 
The Cotton Gin tcdious hand labor until 1794, when Eli Whitney 

invented his cotton gin, one of the first and most 
useful inventions of America. By means of this machine cot- 
ton became a more thoroughly marketable article, and its pro- 



louisia::a fukchase. 113 

duction was vastly stimulated. The development of cotton 
raising in the south and its manufacture in the north began with 
this invention^ and continued to develop until it has become in 
recent years one of the largest articles of export among our raw 
products. 

In the decade from 1790 to 1800 the population of the 
republic increased from 4^000^000 to 5^000,000. Frenchmen 
came from San Domingo and other West Indian Islands; Irish- 
men from what they regarded as oppressions in Ireland; Scotch- 
meU;, Englishmen and Germans came to enjoy the advantages of 
popular government and escape the discontent^ monarchial op- 
pressions and w^ars of Europe. These foreigners were rapidly 
assimilated;, and went to w^ork to acquire land and better their 
condition. The tide of immigration which set in 
Immigration thus early in the history of the republic continued 
to flow hither during the century following. Not 
being able to compete with the slave labor of the souths these 
emigrants avoided that section^ and settled along the east and 
west lines, developing the great West and carrying their skill 
and thrift to the borders of civilization. 

The most important event in the early history of the repub- 
lic was the Louisiana purchase, made during the administration 
of President Jefferson, by which the United States acquired 
title to all the land from the Mississippi to the Eocky Mountains 
and from the Gulf of Mexico to British America. This vast 
Purchase of domain had originally belonged to France, but in 

Louisiana 1762 that nation transferred it to Spain. The 

^ °^ Mississippi Biver was the natural outlet to the 

Ohio valley and the northwest, and since transportation over the 
Alleghany Mountains was exceedingly difflcult owing to the 
lack of suitable roads, it became highly necessary that the west- 
ern settlers should have the great waterway to the gulf kept 
open. The Spanish officials at New Orleans were vexatious, and 
hampered the commerce of the Americans with useless restric- 



114 HISTORY OF COMMERCE. 

tions. In 1800 the Territory of Louisiana was ceded again to 
France^, and President Jefferson soon after sent Mr. Monroe to 
Paris as a special envoy to act in conjunction with our resident 
minister^ Mr. Livingston^ and if possible purchase New Orleans. 
Two million dollars were allowed for the purchase. ISTapoleon 
was in need of funds to prosecute his war with England^, and 
knowing that he could not protect his colony while England 
ruled the sea^ proposed to sell the entire province of Louisiana 
for $15^000^000.* The commission had no authority to make 
the purchase at such a price^ and it was impossible to communi- 
cate with the government at Washington in time to carry through 
the deal^ so they assumed the authority^ accepted the offer^ and 
trusted to the President and Congress to ratify their acts. This 
purchase not only secured the desired outlet to the sea by water, 
but doubled our national area and added immensely to the 
wealth and resources of the nation. 

In 1807 Fulton built his first steamboat on the Hudson 
Eiver, and demonstrated the use of steam in propelling ships. 
This invention exercised a vast influence upon the future inland 
commerce of the United States, and was a potent element in 
developing the resources of the country. It was of the greatest 
importance that our numerous waterways should be utilized as 
channels of commerce, but this was impossible until the applica- 
tion of steam power was invented. Prior to this event travel in 
the interior was slow. By land the pioneer wagons were heavy 

and the roads dreadful; by water the farmers near 
steamboats the rivcrs floated their produce down to market in 

flat boats, and poled them up again. Four months 
were consumed in making the return journey from New 
Orleans to St. Louis. The effect was that the farmer paid dearly 



*The price was $11,250,000 payable in 15-year 6 per cent. United States 
bonds, and the assumption by tlie United States of claims of American 
citizens against France, amounting to $3,750,000. Napoleon agreed not to 
negotiate the bonds at a price which would injure the credit of the United 
States. 



HOME INDUSTRIES. 115 

for all articles which he bought^, but received little for his prod- 
uce. In 1811 Fulton put his first steamboat on the Ohio Eiver 
at Pittsburg, and the results were marvelous. By 1815 the time 
from New Orleans to St. Louis was 25 days and In 1823 it was 
reduced to 12 days. Freight rates were rapidly reduced and 
prices of commodities consumed by the settlers correspondingly 
fell; while on the other hand grain and provisions, being assured 
a more accessible market, rose in price. Lines of packet steam- 
ers were established on all the principal rivers, and developed as 
rapidly as the growth of the carrying trade would justify, until 
the river commerce of the country became very extensive and 
handsome passenger boats were plying on our rivers. This 
means of transportation proved of immense value in the develop- 
ment of the country, and continued until the demand arose 
for more rapid transportation, and the general era of railroad 
building set in soon after the Civil War. 

During the period just prior to the war of 1812 the prosperity 
of the young nation was almost phenomenal. Its foreign com- 
merce had grown to large proportions and the American flag 
was to be found in all the seas and harbors of the world. Home 
industries were equally prosperous. Kaw produce was varied 
and abundant. Motive power in the shape of rivers and torrents 
was abundant, and steam power was just making its appearance. 
Labor being scarce, labor-saving machines naturally suggested 
themselves to an ingenious people. Sawmills multiplied wher- 
ever timber afforded materials for house and ship building, and 
Home Indus- strcams afforded it the means of transportation. 
|J^^^^^^^^°^^*° Agricultural implements were improved. Cotton 
i8i2. began to be raised on an extensive scale and was 

woven at home as well as exported raw. The products of the 
loom could not for many years compete in quality with those 
of England in fineness, but they were stronger and more durable, 
and on these accounts were often preferred. Woolen and linen 
manufactures, first begun on a small scale, were afterwards 



116 HISTORY OP COMMERCE. 

developed into considerable industries. Hemp and flax grew 
abundantly and furnished the materials for sackings cordage 
and sailcloth. Leather became an important article of manu- 
facture^ and in some of the forest towns of New England^, where 
hemlock forests abound^ extensive tanneries were established. 
Iron and glass from small beginnings rose to be important indus- 
tries^ while paper makings one of the humble attempts of the 
young republic^, developed into such a flourishing branch of 
manufacture as to become of immense extent and value. Fish- 
eries were vigorously prosecuted and gave employment to a 
large population^ chief of which were the cod fisheries of New 
Foundland^ the mackerel and the whale fisheries. The latter 
was carried on in the Arctic^ Pacific and Southern Oceans; 
whale-bone and whale oil^ with seal oil and skins^ being the 
valuable products of these enterprises. In the year 1800 Ameri- 
can ships amounting to 130^000 tons burden were engaged in 
whaling. 

During this period (1803-1812) France and England were en- 
gaged in a gigantic struggle. All Europe was affected^ and 
nation after nation was dragged into the conflict. England 
ruled the seas and Napoleon^s armies were invincible on land. 
America^ under the wise policy of Washington^ remained neutral, 
and was reaping a rich harvest in her foreign commerce. Ameri- 
can ships swarmed every sea. They were loaded with the prod- 
ucts of every clime, sailed to the United States, broke the 
Capture of ^^J^S^? Unloaded the cargo, immediately reloaded 

American it again, and proceeded to France and Spain to dis- 

^^^^^ pose of it. The English admiralty courts had held 

in 1800 that while it was illegal for the ships of a neutral 
to carry the products of a belligerent to or from that belligerent^s 
colony, yet where the goods were carried from a belligerent 
colony to a neutral port, unloaded, and entered in the custom 
house, they could then be sent in the same ship to a belligerent, 
without violating international law. Under this decision En- 



WAR OF 1812. 117 

gland saw in 1805 that France was prospering and her colonies 
furnishing her with produce the same as in time of peace, and 
this under the sanction of an English court. The decision was 
accordingly reversed^ and it was held that a voyage from the 
United States to a belligerent port with goods from a belligerent 
colony was illegal. Under this decision American ships by 
the score were captured by the British cruisers. 

Parliament followed up the matter by passing in 1806 an 
Order in Council declaring the whole coast of Europe under 
blockade^ and prohibiting any ship from trading in any of these 
ports without a British license. In retaliation, ISTapoleon issued 
the ^'Berlin Decree'^ declaring the coast of the British Isles in 
a state of blockade. Thus American commerce was placed at the 
mercy of both the French and English. As a result over 1,600 
American ships were captured by France and England and their 
cargoes, worth millions of dollars, condemned and confiscated. 
President Jefferson struggled against these out- 
Warofi8i2 rages as best he could. The people were hot for 

war, but Jefferson knew that the nation was in 
no condition for war, and hence he tried ^'^peaceable coercion.^' 
Congress passed the "Embargo Act" in December, 1807, declar- 
ing an embargo on all American shipping. Our ports were 
sealed absolutely to foreign trade. Jefferson believed that the 
loss of our products would bring England to terms. The 
embargo ruined the commerce of the nation for the time being. 
The price of wheat fell from $2 to 75 cents a bushel, and 
general stagnation and business distress prevailed. Prior to 
the embargo the British had claimed and exercised the right to 
search American ships for British subjects, thousands of whom 
were employed in the American merchant marine, owing to the 
higher wages paid on American vessels. This right of search 
w^as exceedingly obnoxious to the Americans. The Embargo 
Act not having the desired effect on England, war was declared — 
a war which cost the United States $150,000,000, besides the 



118 HISTORY OF COMMERCE. 

destruction of a profitable commerce^, but it vindicated American 
rights^ taught the young republic the necessity for a navy, and 
laid the foundation for reciprocity in international trade, a 
principle which has since exercised an important influence on 
the commerce of nations. 



CHAPTER XII. 

COMMERCE OF THE UNITED STATES— Continued. 

REVIVAL OP MANUFACTURING; TARIFF LAWS; SLAVERY; 

CIVIL WAR. 

When the embargo, followed by war, withdrew the stimulus 
from AmericaiL husbandry by destroying the market for our 
produce, and foreign commerce and ship-building were at a 
standstill, the people^s minds were thrown back upon the manu- 
facturing industries of the country, and American ingenuity set 
to work to improve and develop these. The tariff on imported 
goods, chiefly English, was increased, improved machinery was 
invented for working up raw products, especially in the cotton 
industry of the south, inland communication was improved by 
Commerce ^^^ building of better roads and the construction 

after the War and Operation of steamboats on the rivers. After 
anico I ig ^^^ treaty of peace between England and the 
United States, which was signed at Ghent, December 24, 1814, 
and the defeat of Napoleon at Waterloo in the following spring, 
peace reigned universal on land and sea. The United States 
found itself able to compete with the monarchies of the old 
world in the race for commerce. Its vessels went again to all 
the harbors of Europe, and new avenues of trade were opened 
up. The exports of cotton to England showed a remarkable in- 
crease. In 1809 the number of bales exported was 14,000, in 
1819 this export was 175,000 bales. Considerable quantities of 
grain, rice and tobacco were also sent to Europe, while to the 
West Indies we sent our staple, flour. Furs, hides and other 
products were sent to India and China to be exchanged for tea, 
some of which was exchanged again in Germany at a second 
profit. The one serious drawback of the times was a defective 

119 



120 HISTORY OF COMMERCE. 

financial system. Congress had refused to renew the Charter 
of the United States Bank in 1811. The war had drained 
off the specie^ and the country was filled with depreciated paper 
currency. A new bank was organized in 1817 to improve the 
situation, but it was mismanaged and failed to bring about the 
resumption of specie payments. Finally in 1819 there was a 
panic and general financial collapse. Banks and business houses 
failed and there was general distress. This panic was coincident 
with the one in England. 

In 1825 the Erie Canal, which furnished cheap transportation 
to market for the products of Western New York and the terri- 
tory tributary to the Great Lakes was completed. About the same 
time the government built a military road from Baltimore, 
through Wheeling and Cincinnati to St. Louis, and thus the 
opening of routes of communication with the far west diverted 
m.uch of the produce of those territories from New Orleans to 
New York. Agriculture improved, and the products of the soil 
increased in quantity and variety. Saxony sheep of the best 
breeds were imported for the improvement of the quality of 
American wool. Flax and hemp, hitherto chiefly supplied from 
Eussia, were cultivated more extensively in order to supply the 
demand for these fibers by eastern shipbuilders for caulking 
ships, and also for the spinning and weaving of linen cloth. 
The cotton industry continued to increase at a marvelous rate, 
pjQj^g the price per pound fluctuating with a downward 

Industries tendency, but the gross value increased enor- 

1820-1830 mously. Massachusetts, Ehode Island, New York 

and Pennsylvania were the seats of the cotton industry, the 
largest mills being located at Lowell. The South was an agri- 
cultural section. Its slave labor was better suited to farming 
than to factory work, and there was a scarcity of skilled labor 
in the South. For these reasons the cotton mills were located 
in the North, where skilled labor could be had, and they were 
situated on the coast or on navigable rivers within easy reach of 



HOME INDUSTRIES. 121 

the sea coast, in order that the raw cotton could be advantage- 
ously brought to the mills from the plantations of the South. 
Mining was another industry which began to be developed 
about this time (1815-1830). Eich as the country was in mineral 
wealth, for want of capital little had been done prior to this time 
to develop the mines of iron, coal, lead and the precious metals, 
and even now they were worked in a most inadequate degree. 
The introduction of steam as a motive power on steamboats 
and for propelling machinery in the factories, quickened the 
demand for coal, while the iron and steel industry began a 
development which has since outgrown all others in the diversity 
and importance of its finished product. 

In order to maintain and encourage manufacturing enter- 
prises, the United States early adopted the policy of protective 
duties on imports — a policy which has been a cause of discord 
between the North and the South. The Southern states were 
very fertile and possessed the doubtful advantage of slave labor — 
a class of labor suited best to agriculture. As a consequence 
those states, restricted to agriculture, were opposed to protection, 
while the Northern states, being devoted largely to manufacture, 
sought the support of protection. The planters 

Tariff Laws j - i? xx* i? x i j • 

and Slavery ^^^^ Qcsirous ot getting manufactured goods m 
the cheapest markets in exchange for the produce 
of their plantations. They were free traders, while the North 
was in favor of free labor and opposed to slavery. Slavery and 
trade protection thus became the bones of contention. The 
first tariff law, passed in 1789, imposed a duty of about five per 
cent. In 1812, to meet the demands of war, the rate of duty was 
increased to about fifteen per cent. A new law was passed in 
1816 imposing different rates of duty upon different classes of 
products, but the average was about twenty-five per cent. In 
1824 the manufacturers found it still difficult to maintain suc- 
cessful competition against English products, and clamored for 
further protection. The English had brought fresh skill and 



132 HISTORY OF COMMERCE. 

new inventions to bear upon their goods and were selling at very 
small profits. Notwithstanding the vigorous opposition of the 
planters of the South and consumers generally^ Congress passed 
a new tariff law^ raising the duties to thirty-three and one-third 
per cent. Again in 1828 the law was amended^ increasing the 
duties to an average of forty-five per cent. The South was 
indignant^ since it was not a sharer in the benefits of the tariff, 
but on the contrary suffered in consequence. The cotton, rice 
and tobacco of the South were shipped largely to Europe, and 
in European markets these commodities brought no higher 
prices on account of American tariffs, while the price of all 
manufactured articles which the agricultural states might con- 
sume was considerably increased. Carolina went so far as to 
threaten secession, but trouble was averted, and in 1832 the law 
was modified by taking off most of the merely revenue duties, 
and reducing the protective duties. In 1833 Henry Clay^s Com- 
promise Tariff Bill was passed, by which a gradual reduction in 
duties was provided for, down to a uniform level of twenty per 
cent, by the year 1842. In that year, however, the manufact- 
uring interests in Congress violated their pledge and reimposed 
the old rates of duties. Thus the struggle over tariff and slavery 
went on, the latter becoming more acute until merged in the 
great Civil War of 1861. 

The wise navigation laws of 1792 provided that only Ameri- 
can built vessels should be employed in American commerce. 
Following this was the enlightened foreign policy of neutrality 
during the Napoleonic wars, by which our shipping was unmo- 
lested, while that of other nations suffered. Then the "Tonnage 
Laws'^ previously alluded to helped to develop our merchant 
marine. During the war of 1812 New York and Baltimore 
ship-builders became famous for producing the swiftest fleet of 
privateers called "clipper ships'^ that ever spread sail on the 
ocean, scarcely one of the newly-built being captured by the 
enemy. After the war of 1812 New York and Philadelphia 



MERCHANT MARINE. 123 

merchants established sailing packets to Liverpool and other 
foreign ports. Stephen Girard was one of these merchants. From 
1815 to 1850 may be called a period of reciprocity 
Marine"' ^^ shipping. The law of 1815 equalized the ton- 

nage and import duties on all ships and produce 
of nations which were willing to extend the same privileges 
to American ships and cargoes, and to all other nations we 
offered the severe terms, that "no produce should be imported 
into the United States except in vessels of the United States or 
in the vessels of the citizens of the country of which the goods are 
the growth, production or manufacture.^^ This was an enact- 
ment of the English Navigation Laws. Under these laws our 
foreign commerce flourished and ship-building became a pros- 
perous industry. Our coasting trade and fisheries have always 
been kept exclusively to ourselves, and about 1830, owing to 
increased production of cotton, rice and tobacco for export and 
also for the factories of New England, our coasting trade de- 
veloped extensively. Another great increase in the coasting trade 
set in about 1846, owing to the settlement of California. Our 
merchant marine reached its zenith of size and prosperity in 
1857. Seventy per cent, of our foreign trade was then carried 
in American vessels. About 1850 the period of steam and steel 
began, and this proved a period of decadence for our merchant 
marine. The construction of iron vessels returned to the British 
Isles. The English could build these vessels cheaper than we, 
and they have since possessed almost a monopoly of the industry, 
although there are now indications of a decided change in this 
respect. From seventy per cent, in 1857 the proportion of our 
commerce carried in American vessels has steadily declined, until 
in 1881 to 1885 it averaged barely twenty per cent., and in 1900 
it was less than ten per cent. Seven-tenths of our total export 
trade, and nearly two-thirds of our total foreign trade, both 
export and import, is carried in British vessels. Let us hope 
that this condition of affairs will not long continue. 



124 HISTORY OP COMMEHCE. 

Congress in 1811 refused to renew the twenty year charter 
of the United States Bank organized by Hamilton. During the 
war which followed, the financial system was badly disarranged. 
Specie payment had been suspended and the country was filled 
with paper currency circulating at 15 to 30 per cent, below its 
par value. To remedy this evil and resume specie payment, a 
second United States Bank was organized in 1816 with a capital 
of $35,000,000, power to establish branches, etc. The parent 
bank was in Philadelphia, and twenty-five branches were estab- 
The Second lishcd throughout the country. President Jackson 

United States was hostilc to the bank, as he believed it had been 
opposed to his election. Accordingly in 1833, on 
the pretext that the bank was unsafe, he ordered the Secretary 
of the Treasury to remove the deposits of public funds and to 
place them in state banks. This was almost a death-blow to the 
Bank. It was obliged to call in its loans and reduce the volume 
of its business almost to that of an ordinary bank. 

During the decade 1825 to 1835, the country had been very 
prosperous. The national debt had been steadily reduced since 
the close of the war, and in 1835 the last dollar was paid. The 
public lands were being sold in the west at a rapid rate, and 
this brought a stream of money into the treasury. The receipts 
of the government far surpassed its expenditures. Congress 
declined to reduce the tariff for fear of injuring the manufactur- 
ing interests of the country, and instead of using this surplus 
revenue for internal improvements, which the strict construc- 
tionists claimed would be unconstitutional, or for harbors and 
fortifications along the coast, as urged by Senator 
National Debt ^^^^^^ dccidcd that the amouut should be dis- 

and Surplus ^ 

tributed among the states to be used by them in 
public works as they chose. The surplus amounted on January 
1, 1837, to $37,000,000. Three installments were paid, but be- 
fore the fourth could be made ready, the great financial panic 
struck the country and left the treasury bankrupt. 



PANIC OF 1837. 125 

The cause of the panic was attributed by the friends of the 
United States Bank to the crippling of that concern, and by 
the manufacturers to the reduction in the tariff, but while these 
may have been factors, the most potent cause was, without doubt, 
overspeculation. For ten years prior to the panic the country 
had been upon a general wave of prosperity. Trade was active 
and a general expansion in business was in progress. Merchan- 
dise of all kinds was in demand at advancing prices. Cotton was 
six cents a pound in 1830 and twenty cents in 1837. New busi- 
ness enterprises were commenced and old ones enlarged. Buying 
and selling of western land became a mania. Town sites were 
laid out in the western prairies and lots were sold at inflated 

prices. It is said that so many towns were laid out 
The Panic of -^ HHnois that there was little land left for farms. 

Banks were multiplied, and paper money printed 
to meet the demand for capital with which to carry on the busi- 
ness of the country, irrespective of the amount of specie back of 
it all. The volume of paper money in circulation in 1837 ran 
up to one hundred and forty-nine millions, while the specie sup- 
porting it was less than forty millions. Speculators were buying 
up public lands at one dollar per acre, and as soon as the gov- 
ernment land agents deposited the cash in the banks, the specu- 
lators borrowed it and bought more land. Thus the cash went 
its rounds and property changed hands. Finally the government 
issued its "specie circular,^' requiring that payment for public 
lands be made in specie. This embarrassed the speculators and 
began the feeling of distrust. Banks began to call in their loans, 
and depositors began to withdraw their funds. Cotton fell from 
twenty cents to eight cents, and other products proportionately. 
English investors began to try to withdraw their capital, and 
then suddenly the crash came. This was probably the worst 
panic in point of severity the country has ever seen, although 
the volume of business involved was far less that those of later 
dates. "Cheap money/' rashness and overspeculation; and wild 



126 HISTORY OF COMMERCE. 

financiering by the treasury department of the government^, were 
the combined causes which led to this disastrous result. 

The application of steam power to transportation brought 
about an economic revolution throughout the world, but nowhere 
was this more marked or beneficial than in the United States. 
The canal boats and crude steamboats which came into use 
during the two decades following the war of 1812, were super- 
seded by the river packet and railroad train after 1830. By 
means of improved facilities for transportation, the markets were 
brought nearer to the farmer, so that his cotton, corn or cattle 
were easily delivered and converted into cash, and in return he 
was supplied with manufactured goods at far lower prices than 
formerly, owing to lower carrying charges. Travel also began 
to become something of a pleasure instead of a 
Railroads scrious task, as it had been in the days of the 

stage coach, and the movement of the people broke 
down provincialism, improved the general intelligence and led 
to the social and industrial upbuilding and advancement. In 
1830 there were but 23 miles of railroad in the United States, 
but by 1840 the mileage had increased to 2,775. In a journey of 
two hundred or three hundred miles a passenger was liable to 
be compelled to change cars several times, and the accommoda- 
tions were far from luxurious, but they represented a step in the 
onward march of civilization. In 1850 the mileage of the rail- 
roads had increased to nearly 9,000 and in 1860 to nearly 30,000. 

Another valuable invention, closely connected with the rail- 
roads, came out about this time and added vastly to the facili- 
ties of commerce, the telegraph invented by Morse in 1844. 
Congress in that year made an appropriation of thirty thousand 
dollars for the purpose of constructing a wire from Washington 
to Baltimore, in order to practically test the invention. The 
National Whig Convention was holding its session in Baltimore, 
and over this wire came the news of the nomination of Henry 
Clay for the Presidency. The construction of telegraph lines 



TELEGRAPHS. 127 

then proceeded with great rapidity^ especially in the Eastern 
states. In 1856 the various lines were combined under the cor- 
porate name of the Western Union Telegraph 
Telegraphs Company. The telegraph not only proved to be 

a wonderful addition to the facilities for transact- 
ing the business of the country^, by affording quick communica- 
tion^ but also made the safe and rapid operation of the rail- 
roads possible^ thus accelerating the transportation of goods and 
people. In 1858 the first telegraph cable was successfully laid 
upon the bed of the ocean^, and thus rapid communication be- 
tween the old and the new worlds became possible. 

In 1845 Texas was admitted into the Union^ and thereby 
was added 376^163 square miles to our broad acres^, a large 
part of which is rich prairie^ well adapted to grazing or tillage. 
The vast herds of cattle maintained upon these ranges have 
furnished the country with a considerable portion of its supply 
of meat and hides. A dispute with the Mexican government 
over the boundary of Texas furnished a pretext for war with 
that country^ the real object of which was the acquisition of the 
vast sunny land stretching from the Eocky Mountains away to 
the Pacific. The war was a series of victories for the United 
States^ and Mexico^ poor^ misgoverned and distracted by numer- 
ous revolutions^ w^as overpowered^, and compelled to cede to the 
United States the territory which we coveted. Americans can 
never take pride in the story of this war^ which 
QggsiQ^^*^*^ had for its real object the conquest of a peaceable 
though weaker neighbor's territory. The Mexi- 
cans were forced to make what terms they could. They accepted 
the Eio Grande as their border, and surrendered all land north 
of it, embracing New Mexico and California, extending north- 
ward to the border of Oregon. The United States assumed 
the unpaid claims of American citizens, amounting to $2,500,- 
000, and paid $15,000,000 for the territory. But like all ill- 
gotten gains, this territory led to difficulty at once; and a severe 



128 HISTORY OF COMMERCE. 

dispute arose over the slavery question^ which culminated a few 
years later in civil war. In 1853 an additional tract of 44,064 
square miles of land was purchased from Mexico, called the 
Gadsden Purchase. 

At the time of the Mexican Cession the presence of gold was 
not known, but by accident the discovery was made in the follow- 
ing year, and as soon as the news spread throughout the middle 
and eastern states, a great rush set in for the Pacific coast, both 
overland and by water via the Isthmus of Panama. The popula- 
tion of California in 1847 was 15,000, and the output of gold is 
estimated to have been about $890,000. This amount was in- 
creased to $10,000,000 in 1848, to $40,000,000 in 1849, to $50,- 
000,000 in 1850, to $55,000,000 in 1851 and to $65,000,000 
in 1853, when the population had increased to over 100,000 of a 
motley mixture of nearly all races and tongues, bent upon the 
Discovery of ^^^ mission, that of getting rich quickly. The 
^°\^ ^" , discovery of gold on the Pacific coast gave a new 

impulse to the mining industries of the country, 
and besides developed the trade of that portion of the country 
very rapidly. The harbor of San Francisco was filled with 
shipping, and thrifty towns and cities sprang up where only 
straggling villages existed before. 

Following the example of England in the erection of its great 
crystal palace and exposition at Hyde Park, London, in 1851, 
the first international exhibition in this country was held in 
New York in 1853. It was fitting that this new and thriving 
nation, then a little more than a half century old, should measure 
its progress in the arts and sciences by a comparison with the 
best the world produced. Never before had such a display 
of the products of the hand and brain of man been attempted 
in the Western Hemisphere. In the departments of machinery 
and tools, agricultural implements, hardware, mineralogy and 
mining, as well as the fine arts, America made a very extensive 
and creditable display, rivaling in many respects the productions 



EXPOSITION OF 1853. 129 

of Europe. Not only our choicest products in almost infinite 
variety were presented for exhibition^ but from other countries 
The Great and climcs^ from distant parts of the globe^ came 

New^York ^^ exhibits represented by countless contributors. 
1853 England and France made superb offerings of 

their works of art and manufacture^ and the Sultan of Turkey 
fitted out a steam frigate especially to convey the splendid fabrics 
of the Ottoman empire^ richly carved cabinets^, rugs and carpets 
of wonderful elaboration and beauty. This exposition did much 
to stimulate the spirit of invention and discovery, and improve 
processes of manufacture throughout the country, and was the 
beginning, the formal opening as it were, of what has proven 
to be a half century of the greatest achievements in mechanic and 
industrial arts the world has ever witnessed. 

During the period of 1840 to 1855 there had been estab- 
lished throughout the country a system of banking, under state 
laws, called ^^free banking,^^ by which banks were allowed to 
issue circulating notes based upon little or no security, and 
subject to very loose and inadequate restrictions. The chief 
object in the scheme seemed, on the part of the banks, to be 
to issue notes, get them into the hands of the people for value, 
then take measures to prevent the note holders from calling on 
state Banks ^^^ banks for spccic. Various subterfuges were 
and the Panic Tcsorted to for this purposc. In one instance in 
^ ^^ Illinois, where an effort was made to present the 

notes at the bank's counter for redemption, no counter was 
found, but merely a hired room in a remote and obscure neigh- 
borhood. This unreliable system of banking was permitted by 
statutory enactments in sixteen states, and under it ^^mushroom 
banks'' were started in large numbers all over the west. Paper 
money was plentiful and counterfeits floated in large quantities. 
These conditions induced speculation of all descriptions. Cities 
were laid out, railroads projected, and debts piled up at high 
rates of interest, all based upon the prospects of large returns in 



130 HISTORY OF COMMERCE. 

the near future. A panic was inevitable^ and in the autumn of 
1857 it came;, carrying down in the ruin thousands of reputablo 
firms^ and entailing untold misery as usual upon innocent 
widows and orphans. Nevertheless many of the banks which 
had failed got on their feet again within the next three years^ so 
that when the war began, in 1861, there were 112 of these so- 
called ^*^solvent banks'^ doing business. This ^Svild cat'' money 
continued to circulate until it was driven out of existence in 
1863 by the 10 per cent, tax imposed under the National Bank- 
ing Act. 

The period which we are just now considering — the decade 
preceding the Civil War — was notable for the increased number 
of its inventions and improvements in the processes of manufact- 
ure. In 1857 there were issued 2,000 patents, 438 of which were 
for agricultural implements and processes, consist- 
1850^-1860"^ -^^S chiefly of improvements in cotton gins, rice 

cleaners, reapers, mowers and plows. The next 
year there were issued 3,710 patents, of which 153 were for im- 
provements in reaping and mowing machines, 42 for improve- 
ments in cotton gins and presses, 164 for improvements in steam 
engines, and 198 for improvements in railroads and railroad 
cars. Some of these inventions have proven of the greatest 
importance and economic value to mankind, such as those relat- 
ing to the perfection of the sewing machine, printing presses, and 
the improvements in the manufacture of rubber goods, carpets and 
wall paper. Prior to this period ready-made clothing and boots 
and shoes were practically unknown, these articles being made in 
small shops, employing a few workingmen, but now with the 
advent of machinery for cutting, sewing, etc., they began to 
be turned out by factories at greatly reduced cost to the 
consumer. 

With the minds and energies of the people thus absorbed 
in their abounding material prosperity, new inventions and 
improved processes constantly appearing to render human labor 



CIVIL WAR. 131 

more effective, and matter yielding to the brain and energy 
of progressive man, we approach the great Civil War (1861-1865), 
which marked the opening of a new era in the 
cwirwar Commercial as well as political history of our coun- 

try. Prior to this time the North had been the 
manufacturing section and the South was devoted almost exclu- 
sively to agriculture. Owing to their diverse interests these two 
sections had been in almost constant contention for the past 
fifty years over the tariff question, but gradually there had 
loomed up another and even more serious cause of disagreement, 
the slavery question. The two conflicting systems of labor, free 
in the North and slave in the South, would not mix. Emigration 
would not put itself in competition with slave labor, and hence 
passed in parallel lines westward across the North. Now came 
the Civil War, which cost 600,000 lives and an incalculable 
amount of property, and resulted in an industrial revolution of 
the labor system of the South, forcing that section to adopt the 
system existing elsewhere, and therefrom dates the mechanical 
development of the Sauth. 



CHAPTEE XIII. 

COMMERCE OF THE UNITED STATES— Continued. 

GROWTH OF INDUSTRIES; INVENTIONS AND DISCOVERIES; 
FOREIGN TRADE. 

The Southern states were the scene of the conflict, and re- 
sounded with the tread of armies. As a consequence, the pros- 
perity of the South was arrested during the war and its fields 
and towns destroyed or damaged. The North held the mechani- 
cal industries of the country, and under the stimulus of war these 
industries w^ere expanded to their fullest capacity. Business of 
all kinds in the North prospered, prices were high, and the armies 
in the field were sustained and paid by a thrifty agricultural and 
manufacturing domain behind them. The agricultural South 

could not compete with the manufacturing North. 
After the War Prior to the war, the diversified resources of the 

South were not appreciated — scarcely noticed. 
Her rich deposits of iron and other ores, the coal to work the 
ores, her timber and stone and her water power were almost 
untouched. It was actually contended that manufacturing could 
not be profitably carried on in the South on account of climatic 
infiuences. But the war not only revolutionized the system of 
labor in the South, but thereafter began the mechanical develop- 
ment of the Southern states. With the return of peace, attention 
was turned to the elements which are essential to industrial 
development, and there has since grown up in that section an 
extensive factory system. The South found that besides the 
capacity to raise cotton and tobacco for domestic and foreign 
consumption, great sources of wealth were hidden beneath the 
surface in the mineral deposits of the country. Thus near 
Birmingham, Alabama, rich iron mines were discovered, with 

133 



COTTON INDUSTRY. 1B3 

coke-making coal and limestone needed for smelting and mak- 
ing steel near by^ and thus the cost of making did not involve 
the transportation of either of these products. As a result, 
Birmingham has now become an important manufacturing 
center. 

For a time directly after the war, and as its natural conse- 
quence, agriculture and all other industries in the South were 
depressed, and society was more or less discouraged, disorganized 
and in a state of doubt. Fears were entertained that their great 
staple, cotton, would not be raised so plentifully under free 
as slave labor, but the contrary was proven to be the case. The 
Growth of the largest cottou crop prior to the war was in 1860, 
Cotton and and amounted to 4,669,770 bales. This yield was 

other industries ^^^ reached again until 1871, and since 1876 there 
has never been a year when the crop did not exceed that of 1860, 
while in 1901 it reached the enormous total of 10,383,422 bales. 
While formerly the South exported nearly all of her raw cotton 
or sent it to the mills of New England, she now manufactures 
a very large part of it, 1,583,000 bales having been woven by 
southern cotton mills during the year 1901 as against 1,964,000 
bales manufactured in the North. The opening up of coal mines 
in the South for fuel supply, and the movement of northern 
capital and skilled labor southward, may be ascribed as the 
reasons for the increased manufacture of cotton in the South. 

The growth and development of the cotton industry in the 
South during the past forty years may be almost taken as an 
example of the general development of the country in all lines 
of activity. New industries have been constantly appearing and 
old ones enlarging. New processes and improved machinery 
have been constantly reducing the cost and utilizing products 
which formerly were considered worthless. Many industries 
have passed from the household or small shop to the large fac- 
tory, where steam power or electricity have supplemented man 
power, and thus cheapened production. The wonderful devel- 



134 HISTORY OF COMMERCE. 

opment of the natural resources of the country^ the ambition 
manifested by the people in all lines to supply home demand, 
ever increasing on account of a large immigation, and to have 
a share in foreign markets, have tended to stimulate all lines 
of manufacturing during this period. Added to these, the pro- 
tective tariff has given an additionl encouragement to a large list 
of industries, and assisted in the general commercial advance- 
ment. 

In no class of industries has there been a greater advance- 
ment in the methods of manufacture from the raw to the finished 
product during the past forty years than in that of iron and 
steel, and in none has there been produced a greater diversity of 
finished products. The processes through which the metal 
passes, from the ore in its natural form up to the manufacture 

of almost an unlimited variety of articles for man's 
steeiTndustry Convenience, ranging from the spiral watch spring 

up to the mammoth beam of structural steel, is 
a triumph of inventive genius. One of the principal causes 
of the enormous development of the steel and iron industry has 
been the demand for railroad track, incident to the expansion of 
our railroad systems. Iron rails were formerly used, but steel 
has almost entirely superseded them. The substitution of coke 
for coal and charcoal in the production of pig iron, and the 
cheapening of the process of the manufacture of steel caused by 
the introduction of the Bessemer and Siemens-Martin or open 
hearth system, have tended to facilitate the use of steel in the 
construction of buildings and otherwise, while the invention of 
new machinery usually necessitates the use of steel in its con- 
struction. 

In 1859 petroleum was discovered in Pennsylvania, and the 
supply from that region and from Ohio has thus far proven 
inexhaustible. A method of refining the oil was soon after 
devised, and there are now over two hundred products of this 
mineral oil used for illuminating, lubricating, etc., the whole 



PACIFIC RAILROAD. 135 

constituting one of our most important industries. A great 
demand for this oil in its various forms has made it an important 
article of domestic and foreign commerce. Thou- 
Petroirum''^ sauds of milcs of pipes have been laid from 
wells to the seaboard and the Great Lakes, 
and extensive refineries have been established in New York, 
Philadelphia, Cleveland, Buffalo and Chicago. Large discov- 
eries of fuel oil were made in Texas in 1901, affording a valuable 
source of supply to western consumers, and proving especially 
fortunate for use upon the great prairies of the west where wood 
and coal are scarce. 

In 1867 the United States again enlarged its territory, by the 
purchase of Alaska from the Eussian government for $7,200,000. 
This has proven to be, like other extensions of our boundaries, 
a profitable investment, the seal fisheries alone being worth 
Alaskan much morc than the price paid for the entire 

Purchase couutry. Alaska is 1,200 miles long from north to 

^ south, and 2,100 miles wide from east to west. It 

is the chief source of supply of salmon fish, which abounds plen- 
tifully, and the industry of fish canning here is the largest in the 
world. Valuable gold mines have been discovered and par- 
tially developed, and the country is no doubt rich in other 
minerals. The extensive forests will also prove a source of 
wealth to the nation. 

One of the most important achievements of the decade fol- 
lowing the Civil War was the completion in 1869 of the great 
transcontinental line of the Pacific Eailroad. The astonishing 
development of the Pacific coast, and the travel and traffic that 
inevitably followed, created an imperative need for a cheaper and 
easier method of transportation to and from the 
Railroad caast. This great achievement in railroad build- 

ing, difficult as it was, has since been followed by 
other routes across the continent. The cheapening of transporta- 
tion, together with improved facilities for carrying perishable 



136 HISTORY OF COMMERCE. 

freight, has enabled California to market her fruit, one of her 
great products, throughout the East. The Eastern and Middle 
states have been brought next door to the West, and prices of all 
commodities have tended to become lower to the consumers. Vast 
areas of unproductive and apparently barren land in the West have 
become productive and valuable because they are brought within 
reach of a market. 

At the commencement of the Civil War our foreign trade foot- 
ed up about $700,000,000, the imports and exports being nearly 
equal and the balance being about $20,000,000 against us. Our 
principal export at that time was cotton. The war blockades 
seriously interfered with foreign commerce, and especially re- 
duced our exports, so that in 1865 these amounted to only 
about $166,000,000, almost wholly from the Northern states. 
The great staple, cotton, had been neglected or destroyed and 
very little raised. Industries in the South were prostrated, and 
Foreign home Consumption demanded nearly all the North 

Commerce after produccd. But the foreign commerce quickly 
regained its activity, and continued to increase 
until arrested in a measure by the panic of 1873, the imports, 
however, considerably exceeding in value the exports. The 
principal industries of the country at that time were the tex- 
tiles, clothing, lumber, iron and steel, leather, boots and shoes, 
flour and meal, sugar, paper, printing and publishing, farm 
implements, carriages and liquors, malt and fermented. The 
principal exports consisted of the great natural products, cotton, 
petroleum, tobacco, wheat, lumber and iron, for the United States 
had not yet arrived at the point where its manufactures could 
compete with those of Europe. The depression which followed 
the panic of 1873 caused a falling off in our foreign trade, but after 
1875 trade revived, and for nearly ten years showed a steady in- 
crease. The exports now began to exceed the imports, and 
with slight exception have continued in that relation until the 
present time. Since 1896 our imports have increased com- 



FINANCE. 137 

paratively little,* while our exports have enormously extended, 
leaving a balance of trade in our favor of nearly $700,000,000. 
The United States is now a vast exporter of meat and other 
food products, while its manufactures are constantly finding a 
wider market. The skill and ingenuity of American workmen, 
with the latest and best types of machinery, enable the United 
States to manufacture goods cheaper than Europe, while paying 
American workmen larger wages than are paid in the old world. 
In 1861 the banks throughout the country suspended specie 
payment. The National Treasury was empty, and to carry on 
the war the government resorted to an issue of paper money, 
called ^^greenbacks.^^ The volume of this currency ran up to 
$450,000,000, and, as was inevitable, depreciated in value, thereby 
causing a rise in prices of commodities. Two years later (1863) 
the National Banks came into existence, with authority to issue 
paper money based on their deposit of government bonds. Thus 
the country went entirely upon a basis of irredeemable paper 
Resumption moucy. After the war closed, it was the desire of 
of Specie the government to get back towards a specie basis, 

ayment ^^^ ^^ ^-^^^ ^^^ proposcd to gradually pay off and 

retire the greenbacks. This was done until the volume had been 
reduced to $356,000,000 in 1868. 

There was a general outcry against a contraction of the 
currency. Speculation throughout the country was active 
and business was constantly expanding. Corporations, indi- 
viduals, cities and states were active in the promotion of their 
various enterprises and works. An unprecedented mileage of 
railways was constructed, and a corresponding bonded indebted- 
ness floated. Thus the condition of the country was unstable. 
Our foreign commerce from the year 1872 had been very un- 
satisfactory, the balance of trade setting heavily against us, and 
foreign investors had called in some of their loans. The crash 

♦Our total imports in 1901 were $823,172,165 and total exports amounted 
to $1,487,764,991. 



138 HISTORY OF COMMERCE. 

came like a clap of thunder out of a clear sky when the firm 
of Jay Cooke & Co. failed in New York. This was the begin- 
ning of a general break in public confidence, and 
Panic of 1873 > numcrous failures of banks and business houses 
all over the country followed. Credit in busi- 
ness was refused^ and debtors everywhere were pressed for pay- 
ment. There was a general run upon savings banks, many of 
which failed, disclosing shocking irregularities in management. 
The prices of agricultural products declined, and manufactured 
goods were a drug on the market. Factories closed or ran on 
short time, and thus the months drew on until after nearly two 
years business began to revive again. Severe as the lesson had 
been it taught the people the necessity for a stable currency, 
and resulted in steps being taken to reach the resumption of 
specie payment, which was accomplished in January 1, 1879. 

About 1876 there was a great advance in the production of 
breadstuffs in the United States. The vast wheat fields of 
Dakota were opened up to cultivation, and with improved farm 
machinery and facilities for handling the immense volume of 
grain there produced, grinding it into flour, or exporting it in 
bulk by waterways to European ports, an immense industry grew 
up and greatly added to the volume of our foreign trade. The 
United States became at once the greatest exporter of wheat 
and breadstuffs in the world, selling about one- 
the^Northwest ^^^^ ^^^ ^^^P ^^ foreign couutrics. The method of 
manufacturing flour was revolutionized and cheap- 
ened about this time by new milling processes, and with low 
rates for shipment by rail and water routes to the seaboard 
through the Great Lakes and Erie Canal to New York or the 
St. Lawrence River to Montreal, where it was loaded into 
ocean steamers, we were able to supply Europe with breadstuffs 
cheaper than from any other source. In 1867 the United States 
exported a little over eight per cent, of its wheat product, but 
in 1880, with the increased production and foreign market 



THE Mckinley bill. ia9 

opened up, this percentage had risen to more than forty per cent., 
and now Great Britain buys four-sevenths of all the flour the 
United States has to sell. 

The McKinley bill which became a law in 1890 enlarged the 
free list, but advanced the duty upon many manufactured arti- 
cles. The sugar consumed in the United States in 1890 
amounted to nearly 1,500,000 tons, of which only 250,000 tons 
were domestic product. Thus the protective duty on this article, 
while benefiting the Louisiana planters, served to raise the price 
on all sugar consumed throughout the country, and had little 
effect in increasing the volume of the domestic output, owing 
to the fact that the area of sugar land in the South was limited. 
On the other hand to remove the duty entirely would destroy 
the sugar planters of the South, who would be 
^d^R^dp^l^y ^^tterly unable to compete against the sugar grow- 
ers of Cuba, owing to the fact that sugar can be 
produced much cheaper in Cuba than in Louisiana. The Cuban 
grower does not replant his cane oftener than once in eight 
or ten years, while the Louisiana planter must replant every 
second year. The Cuban grower also has the advantage of a 
more favorable climate and a longer grinding season, with no 
damage from frosts. Therefore, to protect the Louisiana sugar 
grower and the public, the McKinley Act put sugar on the 
free list, and paid a bounty to domestic sugar producers. At the 
same time a discriminating duty of one-tenth of a cent per 
pound was placed upon sugar imported from countries which 
paid a bounty upon sugar exportation. 

But the most important and interesting feature of this tariff 
legislation was the reciprocity feature, due to the far-seeing 
statesmanship of Secretary of State James G. Blaine.* His 
foreign policy looked to a trade federation of the countries of 



♦Thomas Jefferson was the originator of the reciprocity idea, and in a 
report to Congress in 1793 recommended reciprocity as the true method of 
meeting the problem of our foreign commerce, 



140 HISTORY OF COMMERCE. 

the Western Hemisphere. He elaborated the Bureau of Ameri- 
can Eepublics, and through his efforts, under the administration 

of President Harrison, a Pan-American Congress 
Reciprocity was held in Washington presided over by Mr. 

Blaine. Eeciprocity treaties were concluded with 
several countries, considerably extending our trade. Those with 
Germany, France, Belgium and Italy resulted in relieving Ameri- 
can pork from the embargo placed upon it in those countries. 
Under the policy of reciprocity our foreign commerce increased 
rapidly. Thus in 1891 we sent to Cuba approximately 115,000 
barrels of flour; in 1892, 366,000 barrels; in 1893, 610,000 bar- 
rels; in 1894, 662,000 barrels. After the repeal of the act, we sent 
Cuba in 1895, 380,000 barrels of flour; in 1896, 177,000 barrels; 
and in 1898, 130,000 barrels. 

Nothing has contributed to the commercial growth and 
development of the United States more than its railroad system, 
which now reaches, with its multitudinous branches, nearly every 
village in the eastern half of the republic, and all of the im- 
portant towns in the western portion, while the trans-continental 
lines provide great highways of travel and transportation from 
ocean to ocean. The growth of our railway systems, from their 
unpropitious beginning in 1827 to their present gigantic propor- 
tions, embracing a mileage of nearly 200,000 miles, is one of the 

most animated chapters in our national history. The 
Railroads United Statcs has a far greater mileage of railways 

than any other country — more than all Europe, and 
nearly one-half that of the entire world. About 1,300,000 
freight and 26,000 passenger cars run upon these tracks, and 
the net earnings foot up nearly $400,000,000 per annum. But 
the railway systems of the United States have not only extended 
in mileage but in even a greater degree in their capacity to move 
freight and passengers. The roadbeds are more substantial than 
formerly, the rails larger, heavier, and of steel instead of iron; 
the roads have fewer curves, lower gradients, steel bridges, 



LAND TENURES. 141 

double tracks, larger cars and more powerful engines, so that 
trains haul heavier loads and make better time.* Numerous 
safety appliances, signals, improved air brakes and other devices 
now contribute to the safety of railroad travel, and reduce the 
loss by accidents. Withal there has been a general cheapening of 
carrying cargoes, the average cost of carrying a ton of freight one 
mile now being less than one cent, whereas in 1865 the cost was 
upwards of three cents. With lower freight rates and quicker 
service, together with refrigerator cars and special facilities for 
carrying live stock and perishable articles like meats and fruits, 
the market for these has widened, their price has cheapened and 
become more uniform, and the cost of the necessaries of life to 
the consumer has constantly tended to become lower. 

Allusion was made to the division of the landed estates of 
France under Napoleon, by which agriculture was greatly im- 
proved, and also to the division by Henry VIII of England of the 
large landed properties held by the monasteries during the six- 
teenth century, and the beneficial effect of this division upon the 
commercial welfare of the kingdom. Under the English law of 
primogeniture the eldest son inherits the entire estate of his 
father, and as a consequence there are yet large bodies of land 
in England which have been held intact by a single individual 
and his descendants from generation to generation for 
hundreds of years, and which cannot be sold or di- 
vided. This is greatly to the disadvantage of the agri- 
cultural classes. To be able to own the 
Land Tenures little farm wliich he tills is a great encouragement 
to the small farmer. He at once becomes interested 
in its proper and successful tillage, takes care of the improve- 
ments, and is decidedly a better farmer. The law of primo- 
geniture and also the English doctrine of entailment, whereby 
a testator can limit or restrict the future ownership of an estate 



♦The time between Chicago and New York has now been reduced to 
twenty hours. 



142 HISTORY OF COMMERCE. 

to certain persons and their heirs, was introduced into this 
country as a part of the common law of England, from which 
our system of jurisprudence was borrowed. These laws 
were like a "dead hand^^ upon the land, sending it down for gen- 
erations in the line of the eldest male. The aristocratic families 
in New York and south of Pennsylvania were favorable to these 
laws, as sustaining and perpetuating their leadership. Massa- 
chusetts abolished these laws of inheritance but recognized their 
spirit to a degree by giving a double portion to the eldest 
son, according to the Mosaic code, but divided the rest among 
the daughters as well as the sons, and this system prevailed 
generally throughout New England and also in Pennsylvania; 
but after the American Revolution, the founders of our repub- 
lic, recognizing its injustice to a portion of the heirs of an 
estate, and its objectionable feature as a hinderance to commer- 
cial progress, chiefly through the efforts of Thomas Jefferson, 
abolished it. Estates in this country can be subdivided or 
transferred with ease, and are free from many of the prescriptive 
rights and entailments which prevent or hinder transfers of 
titles to land in the older countries. By a convenient system 
of surveying the land and dividing it into counties, townships 
and sections, located with reference to established meridians, 
and the recording of titles upon public books of record, the 
transfer of land is encouraged and made easy. This, we believe, 
has had a marked effect, upon not only the agricultural classes, 
by inducing thrift and industry, but also upon the general 
progress and commercial welfare of the nation. 

To signalize the attainment of the one hundredth anniver- 
sary of the birth of the republic a great exposition was held 
in the city of Philadelphia in 1876, in which were exemplified the 
wonderful improvements in the industrial and mechanical arts 
made since the Crystal Palace exposition in New York in 1853. 
From the mammoth Corliss engine, which put in motion fourteen 
acres of innumerable steel and iron organisms, the visitor could 



EXPOSITIONS. 143 

examine the processes of nearly every important manufacture on 
the globe. Numerous great palaces^ each devoted to a particular 
department of human activity or achievement^ were completely 
filled with extensive and interesting exhibits^ from not only the 
United States but from all parts of the world. Egypt sent speci- 
mens of corU;, cotton, sugar, woods, fruit, honey and perfumery; 
Australia sent wool, iron, wood, tin and agricultural products; 
Centennial Switzerland, her far-famed watches; Norway and 

Exposition Sweden, their glass work, wood carvings, porcelain, 

^ ^ iron and steel; Holland, her excellent models of 

dikes and sea coast defenses, bridges and dams; China, her jars, 
vases and other ceramics; Japan, her porcelain and bronzes; 
Italy, her fine art contributions; France, her vases, statuary, tex- 
tiles and wines; England, her woolens, cotton and silk goods, 
hardware, etc., and thus the infinite collection was made up, 
proving to be a vast object lesson upon the achievements of the 
race and the brotherhood of man. 

The Centennial Exposition was only surpassed by the World's 
Columbian Exposition held in Chicago in 1893 to commemo- 
rate the 400th anniversary of the discovery of America. In 
magnitude and grandeur the palaces of the White City surpassed 
those of any exposition ever previously attempted. While the 
displays were commensurate with the beauty, variety and extent 
of the Palaces in which they were installed, the one great dis- 
tinguishing feature of the exposition of 1893 was the display in 
World's coium- electricity. In 1876 the telegraph constituted al- 
bian Exposition most the solc practical application of electricity to 
^^^^ the utilities of man, but in 1893 we had the elec- 

tric light in its varied forms, the electric motor for the propul- 
sion of machinery and cars, the telephone and numerous other 
adaptations of this wonderful though subtle power. The one 
great lesson of this exposition was, that we had been, and were, 
passing through an age of invention. Thousands of examples 
were to be seen on every hand of inventions which multiplied 



144 HISTORY OP COMMERCE. 

human control over natural forces. In the language of President 
McKinley at the Pan-American Exposition^ his last public ad- 
dress^ ^^Expositions are the timekeepers of progress. They record 
the world^s advancement. They stimulate the energy, enter- 
prise and intellect of the people and quicken human genius.^^ 

Through the inventive genius of man, manufactures have 
been cheapened during the past hundred years, while at the 
same time the price of labor has constantly advanced and the 
hours have shortened, thus greatly improving the condition of the 
working clas::es. In 1790 carpenters received 60 cents a day; 
in 1800, 70 cents; in 1810, $1.09; in 1820, $1.13; in 1830 to 
1840, $1.13 to $1.40, and about the same up to 1860; in 1880, 
$2.42; and in 1890, $3.50, with the day shortened 
Rate of Wages from ten hours to eight. Common laborers in 
1790 received 43 cents a day; in 1800, 62^ cents; 
in 1810, 82 cents; from 1810 to 1820, something over 90 cents; 
and 1840 to 1860, from 87^ cents to $1 per day.* While ma- 
chinery has displaced hand labor, new industries have sprung 
up to furnish work for all willing hands, and the shortening of 
the hours, with better pay^ has given w^orkmen time and means 
for self-improvement and social enjoyment. Under the modern 
factory system men are brought into closer relationship with 
others, and as a consequence a higher standard of intelligence 
prevails. Low grades of labor are constantly giving place to edu- 
cated labor, and what are luxuries to one generation become 
necessaries to the generations which follow. This is illustrated 
by the fact that ^^there was a time when a linen sheet was worth 
thirty-two days of common labor, and a gridiron cost from four 
to twelve days' labor.'' 

In 1898 the Hawaiian Islands were annexed and now form 
a territory of the United States. Their chief productions are 
sugar, coffee, rice and bananas, the principal export being raw 
sugar. The chief value of the islands, however, lies in the fact 

♦Wright's Industrial Evolution in the United States. 



ISLAND POSSESSIONS. 145 

that they are situated at the crossing of the routes of ocean 
travel between America^ Asia and Australia, and afford a con- 
Hawaiian and venient coaling and supply station for ocean ves- 
Phiiippine sels. As a result of the Spanish-American War, 

Spain ceded to the United States in 1899 the island 
of Porto Eico, one of the Antilles, and the extensive group of 
the Philippines in the Pacific. Porto Eico produces cotton, 
sugar, coffee, fine tobacco and tropical fruits. The climate is 
healthful, and the island will no doubt be greatly improved and 
developed by American capital. The Philippines are of volcanic 
origin, with mountain ranges predominant, but the valleys are 
adapted to tropical argiculture. The coast lands, plains and 
valleys produce large quantities of Manila hemp, raw sugar, 
tobacco and cocoanuts. The Manila hemp is of a superior qual- 
ity, and the islands have practically a monopoly of the industry. 
The United States and Great Britain take nearly all of the crop. 
While the United States has for many years bought more than 
one-fourth of the Philippine exports, its share of the imports 
has been small. Under the new relation, however, as a territory 
of the republic our trade will no doubt greatly extend. The 
greatest value of the Philippines to the United States, however, 
will no doubt prove to be their proximity to Asia, and the aid 
they will afford in securing and carrying on an important and 
constantly expanding trade with China, where our manufactures 
are now being introduced. 

Our total export for the year ending June 30, 1901, amounted 
to the enormous sum of $1,487,764,991, being the largest volume 
of exports during any year in the history of the republic. Of 
this sum $944,000,000, or nearly 65 per cent., were the products 

of agriculture, and of these breadstuffs, such as 
Commerce whcat, com, rye, oats, barley, etc., amounted to 

$276,000,000; cotton, $314,000,000; provisions, 
comprising meats and dairy products, $197,000,000; animals, 
including horses, cattle, hogs, sheep, mules and poultry, $52,- 



146 HISTORY OF COMMERCE. 

000,000; raw tobacco, $28,000,000; oil cake, $18,000,000. The 
exports from the products of our mines, including coal and 
mineral oils, amounted to $28,000,000, or 2 6-10 per cent.; of 
our forests, $55,000,000, or about 3| per cent.; and fisheries, 
$8,000,000, or about J per cent. The total export of the prod- 
ucts of our manufactures in 1901 amounted to $412,000,000, 
or about 28:^ per cent, of the whole. The total imports of the 
United States in 1901 amounted to $823,172,165, leaving a 
balance of trade in our favor of $664,592,826. The total manu- 
factures of the United States now foot up annually $13,000,000,- 
000, which is about forty per cent, of the entire manufactures of 
the world. This enormous increase of manufactures* places the 
United States in the ranks of the great manufacturing nations of 
the world; and whereas heretofore our exports have been chiefly 
agricultural products, we may expect in the future a large in- 
crease in the exports of our manufactures. We are now supply- 
ing Europe with articles which we formerly imported, and 
American products are establishing a reputation for excellence 
in foreign markets. With the natural factors of production 
yet largely undeveloped and in no prospect of exhaustion, aided 
by the genius of the American inventor and the capacity and 
enterprise of the American business man, we believe the com- 
mercial future of the United States is destined to a remark- 
able development. Social and industrial problems may confront 
us, such as combinations of capital and labor, tariff and finance, 
])ut let us hope that these may all be wisely solved, and that as 
our commerce grows in greatness it may be governed by the 
principle of right. 



♦In 1870 our total manufacturing amounted to about $4,250,000,000, or 
less than one-third of their preseat value. 



/ 



41 



io 



^£i ^u 113 iuy 1U5 Longitud 



105°Longitude 101° West 







S / 






|_^akomCessi6 




MONEY. 



CHAPTEE XIV. 

NATURE AND USE OF MONEY. 

AS AN ELEMENT IN CIVILIZATION; KINDS; BARTER; 
ESSENTIALS OF MONEY. 

Having traced briefly the history of the commerce of dif- 
ferent nations and times, we shall now proceed to consider the 
nature and uses of one of the most important instruments of 
commerce, viz., money. 

Under a republican form of government, where every citizen 
is interested as a factor in making the laws, either directly or 
indirectly, it is of prime importance that the subject of money 
Importance of should be Understood. Under a clever play of 
an Understand- words, politicians oftcu dcceivc the masses and lead 

ing of the i • t it- 

Subject them into dangerous fallacies upon this subject, 

the result of which may be financial legislation of the most 
serious and perhaps disastrous character. Nothing which Con- 
gress can do will so directly and vitally affect the interests of the 
people for their w^elfare and happiness, or their discouragement 
and misery, as legislation upon this point, and likewise Avhen 
questions of monetary policy arise in the executive branch of 
our government, the policy pursued by the president is of vital 
importance to the people. If, for instance, owing to changes in 
our financial policy there is a general rise in prices, debtors will 
gain at the expense of creditors; a tenant with a long lease at 
a fixed rental will gain at the expense of the landlord, and vice 
versa. Thus one class will receive greater benefit and advantage 
from the general wealth and prosperity of the country than 
another. 

147 



148 MONEY. 

The immense power for evil which may be caused by a gov- 
ernment changing the currency is aptly described by Lord 
Effects of Macaulay when he refers to th^ condition of af- 

Changes in the fairs in England at the close of the 16th century, 
urrency when the currcucy was debased by Henry VIII and 

Edward VI. He says: '^It may be doubted whether all the 
misery which has been inflicted on the nation in a quarter of a 
century by bad kings, bad parliaments and bad judges was equal 
to the misery caused in a single year by bad crowns and bad 
shillings. The evil was felt daily and almost hourly in almost 
every place and by almost every class.^^ A similar state of affairs 
existed in France after the Kevolution, when the constitutional 
government flooded the country with irredeemable paper money. 
^'^What the bigotry of Louis XIV and the shiftlessness of Louis 
XV could not do in nearly a century was accomplished by thus 
tampering with the currency in a few months. Commerce was 
dead — betting took its place. ^^ Thus we see the importance of 
universal enlightenment upon this subject of money, if we would 
protect ourselves from the evils which result from ignorance. 

Man in his primitive and barbarous condition lived upon the 
spontaneous production of the ground. Advancing a little in 
Man in the ^^^ ^csile of civilizatiou, he made a few rude im- 

Lowest plements such as a bow and arrow, a spear and 

fish-hook by which he was able to better supply 
his wants. Thus far his individual needs were supplied by his 
own efforts or those of other members of his family or tribe, but 
as he advances a little higher in the scale of intelligence and 
his wants increase he learns that it is an advantage to exchange 
the products of his labor for those products of the labor of 

others which he does not possess. The hunter 
Barter exchaugcs a carcass of meat or a skin, the product 

of the chase, for a bag of corn; the herdsman ex- 
changes with the carpenter, the tailor with the fisherman, etc. 
This is called barter. This is the beginning of commerce. 



MEDIUM OF EXCHANGE. 149 

Here is the commencement of ''division of labor/' that principle 
which has produced such a high degree of efficiency in the arts 
and sciences of our time. But observe the disadvantage of the 
system. The herdsman may have sheep to exchange for a coat^ 
but the tailor may not need sheep;, while the carpenter may need 
sheep;, but the herdsman may not require the services of the car- 
penter^, and thus the difficulty would always be to find a person 
willing to make the desired exchange. In the early stages of 
society when wants are few and simple the difficulties may be 
overcome^, but as man progresses and his wants multiply, it 
becomes increasingly difficult for the members of the community 
to make satisfactory exchanges. 

From the foregoing we see that exchange is a necessity of 
civilized life and in order to effect exchanges to any considerable 
extent a ^^medium of exchange'^ (money) is necessary. The 
earliest form of money was probably the skins of fur bearing 

animals, and these are still used as a medium of 
Exchange cxchauge amoug the Indians in the far northern 

part of ISTorth America. Dried fish, shells and 
beads were used as money by other Indian tribes. The early 
Greeks and Eomans used cattle and wine as money. Our own 
history in colonial times furnishes numerous examples of various 
articles having been used as money, among which may be men- 
tioned tobacco in Virginia and Maryland and corn in Massa- 
chusetts. The Pilgrim fathers found the aborigines using 
wampum as both an article of adornment and a medium of ex- 
change throughout New England. It was a kind of bead made 
from a species of shell found in sea water. These beads were of 
different sizes and colors, and their value was correspondingly 
different. This species of money was an important factor in 
the early civilization of New England. It brought the furs from 
the north and west to the Massachusetts colonists and they in 
turn exchanged these for sugar, tools and other commodities 
with the English and Dutch traders. During the early settle- 



150 MONEY. 

ment of California by the gold seekers of ^49, gold dust by 
weight was used as a medium of exchange. 

Eising higher in the scale of civilization^ we see the im- 
portance of having a better medium of exchange. It must be a 
Precious Commodity with great value in small compass. It 

Metals as must bc Something in universal demand^ so that 

°"^^ it will circulate widely; it must be something 

that is durable and will not suffer from decay or rust when 
stored or from wear when in use; it must be something that is 
divisible so that a great variety of denominations may be made 
for use in the multitude of exchanges large and small. All of 
these qualities point at once to the precious metals as the most 
suitable articles to constitute the money of civilized man. Gold 
and silver are sufficiently rare to embrace great value in small 
space; they are distributed over the entire globe^ like the human 
race^ and their quality is always the same wherever found. 
Besides^ they are metals which can be readily used for other 
purposes than for coinage^ in case there should be a temporary 
overproduction of them^ so that their purchasing power may 
be said to be more uniform and universal than that of any other 
commodity. They are practically indestructible^ being capable 
of resisting rust^ and when combined with an alloy of harder 
metal^ suffer little from abrasion. Gold may be refined^ and al- 
loyed, united and divided, with absolutely no loss whatever of 
the pure metal. Silver suffers a very slight loss under such 
treatment. It was soon discovered, too, that to reduce the wear 
and tear to the minimum the most convenient form in which 
the metals could be coined for use as money was round with 
flat sides to receive the inscription or stamp of value and milled 
edges to prevent clipping. 

As previously stated, gold and silver are used extensively 
for articles of adornment and as jewelry, tableware, etc., and 
it is probable that their general usefulness as commodities first 
suggested their use as money. The fact must not be lost sight 



COINAGE. 151 

of by the student of this subject that real money is a commodity, 
and the selling of corn for gold is an act of barter. The word 
barter is commonly used to signify the exchange 
Commodiur ^^ ^^^^ article for another without the use of 

money^ but it must be remembered that all 
trade is barter when the precious metals are employed as equiva- 
lents^ since these are commodities. This important fact forms 
the basis for a correct understanding of the entire science of 
money. 

It will thus be apparent that the coinage of a precious metal^ 
while it changes its form^ does not destroy its character as a 
commodity^, and the exchange of the substance^ 
Conv^nie^nce whether coiucd or in its crude state, is an act of 
barter. In fact it is not necessary that the metal 
or other substance used as money should be coined at all. Gold 
and silver were used as money before they were coined. They 
were then measured by weight, and to avoid this inconvenience 
the stamp was put upon them indicating the weight, which, 
says Aristotle, was afterwards taken to indicate value also. All 
that coinage does is to save the trouble of innumerable weigh- 
ings and assayings which would hamper trade and prove so 
troublesome and inconvenient as to largely destroy the usefulness 
of money as a measure of value. Another advantage in coins of 
the precious metals, early recognized, was their durability. There 
was serious shrinkage and deterioration in fish or tobacco, as 
money, and hides were not divisible, while all of these articles 
were not easily transferred or transported from place to place. 

All writers agree that the essentials of a good kind of money 
are durability, portability, divisibility, homogeneity and uniform- 
ity in value. These qualities seem to exist in gold 

Essentials of i*i j. j. Ji.ii • iti* 

j^Qjjgy and Sliver to a greater extent than is embodied m 

any other two metals. Gold and silver, being com- 
modities, are of course subject to some fluctuations in value, 
and silver especially has shown a marked change in value in 



152 MONEY. 

recent years, but on the whole these metals are nearest uniform 
in value — fluctuate less than other commodities. Divisibility is 
the quality which permits a metal to be divided without loss 
of value. When a $20 gold piece is cut into a number of small 
parts^ the sum of these will be $20 less, of course, the few atoms 
lost in the operation of cutting, which are very insignificant. 
All parts of metallic money should be homogeneous, that is, of 
the same quality, so that equal weights will have exactly the 
same value. There may be different qualities of steel or iron, 
but of pure gold or silver there is only one quality. 

As an instrument of commerce and an aid to the progress 
and welfare of man, money is indispensable. Without it divis- 
ion of labor to any considerable extent would be 
A^"tTp^ogr^ss impossible; there would be little inducement to 
work when the products of one's labor could not 
be disposed of without finding persons who happened to want 
such commodities and have others to give in return that he 
himself would desire. The fact that there is in universal circula- 
tion a commodity, the holders of which are ready to exchange 
for the services of the farmer, mechanic, artist and inventor, 
is a stimulus to effort and industry, and brings thousands of 
products to market which could otherwise never have come into 
existence. The use of money tends to bring mankind into 
closer relations of inter-dependence, thus broadening the mind 
and character, and teaching indirectly the doctrine of the 
universal brotherhood of man. By distributing the products 
of labor over the earth's surface where and when they are 
needed, it is the means of banishing famine, while on the other 
hand the absence of money tends to isolate man. Isolation 
breeds suspicion and jealousy and these lead to strife, war, slav- 
ery and famine. 



CHAPTER XV. 

FUNCTIONS AND KINDS OF MONEY. 

FOUR FUNCTIONS; SUBSIDIARY COIN; COMPARATIVE VALUE OF 
SILVER AND GOLD; DEMONETIZATION OF SILVER, ETC. 

Money has four functions, viz.: 1. A medium of exchange. 
2. A measure of value. 3. A standard of value for future pay- 
ments. 4. A store of value. 

Money is as essential to the interchange of commodities as 
language is to the interchange of ideas. Without some com- 
mon medium of exchange it would be absolutely 
ExchangT^*^ impossible to carry on the manufactures and com- 
merce of the country. The rude system of barter- 
ing one product for another as the parties may each need, is 
only adapted to a low civilization where wants are few and sim- 
ple. The history of civilization and progress is concurrent with 
the history of money. The breaking up of feudalism in the 
middle ages, and the growth of commerce, was due largely to the 
introduction and use of money, by which the vassals were able 
to pay their rent in money instead of services. 

In order to effect exchanges of commodities there must be 
an equality of values, and in order to establish this equality of 
values a measure of value is necessary. A meas- 
VaiuT^"^^° ure of value in the exchange of commodities is 
as necessary as the yard stick or pound weight in 
measuring quantities. It is useless to convert all things into 
terms of money as a medium of exchange unless this is done at 
certain rates, for without fixing the rate or measure of value 
between commodities no exchange is possible. In this country 
the standard unit of value is the gold dollar consisting of a 
certain amount of gold and alloy fixed by act of Congress, and 
all values are measured in dollars or parts of a dollar. Al- 

153 



( 



164 MONEY. 

though the gold dollar is the standard, it is not necessary that 
all payments be made in gold dollars. We use silver, nickel, 
cojDper and paper as actual mediums of exchange, but of course 
they are all founded upon the gold dollar as the standard. A 
farmer agrees to pay a fixed proportion of his produce as rent, 
say one-third of his corn, but when the time arrives for payment 
he may, by agreement with the landlord, pay in gold, silver, 
paper, wheat, cattle or any other commodity, the quantity 
being measured, of course, by the value in gold dollars. In 
other words, the medium of exchange or payment may be 
different from the measure of value. We may measure in one 
thing, and pay in another. The medium of exchange would be 
useless unless measured in terms of the standard, and the meas- 
ure would be useless w^ithout some medium of exchange by which 
the transaction could be carried out. A person having an article 
for sale desires to know what its value is, compared with other 
articles; that is, to have it measured by a common, recognized 
standard of value, but he also desires that, when he is ready 
to sell the article, there shall be a medium of exchange by which 
he can dispose of all, or as much of it as he desires, without 
having to resort to the primitive system of barter. 

Since many contracts involve the payment of money at some 
distant future time it is essential that money should possess 
A standard of stability or Uniformity of value. Suppose that in 
Value for Fut- the casc of a lease for many years the tenant 
ure Payments ^grccs to pay a fixcd rental in gold, and during the 
term of the lease the production of gold at the mines should 
be greatly increased — doubled, say. The result would be that 
the value of gold would diminish and its purchasing power 
would be reduced. Prices of other commodities would rise. 
A gold dollar would not buy as much of anything as it did 
before. Now the tenant would be able to sell his goods at higher 
prices but his rent would remain the same in dollars. In this 
case the landlord would suffer a disadvantage. Suppose, on 



STANDARD OF VALUE. 155 

the contrary, that the mines failed to yield the customary amount 
of gold for a series of years and gold became scarce. Its scarcity 
would increase its value. Then a dollar of gold would have 
greater purchasing power and prices of other commodities would 
fall. The rent under this long term lease would remain the 
same, however, and the tenant must now pay his rent in dearer 
money. The landlord in this case would reap an advantage, 
as he would be getting a higher rent — the same rent nominally, 
but of greater purchasing power. 

The whole fabric of the business world is made up of an 
endless series of contracts, many of them extending into years 

of futurity for their fulfillment, such as contracts 
Contracts ^^^ futurc delivery of goods, leases of houses and 

lands, hiring of services for a term of years, the 
settlement of estates of inheritance to be made upon the ma- 
turity of minors, or the payment of pensions, annuities or life in- 
|surance, and it is important in all such undertakings that the 
money which is our standard of value now, and the basis on 
which the contract is made, shall continue uniform and finally 
possess the same value or purchasing power at the end of the 
period of time for which the contract runs. 

Were our standard of value such a commodity as wheat, an 
abundant crop would diminish its purchasing power and cor- 
respondingly raise prices of other commodities and vice versa to 
the serious injury of one class and the benefit of another. For- 
tunately for the commodity gold, which all of the most advanced 
nations have chosen as their standard of value, its production 
is remarkably uniform. The earth yields a constant and never- 
failing supply of the precious metal, not of such abimdance as 
to affect its value or relieve man of the necessity of giving back 
value in labor for value in gold received, yet in suflScient meas- 
ure to repay the effort in seeking and mining it. It costs sub- 
stantially a dollar in labor generally to get a doUar^s worth of 
gold out of the earth and coin it into money. Thus gold is 



156 MONEY. 

especially adapted to perform this function of the money stand- 
ard of value for future payments. 

Money may be said to perform a fourth function — that of a 
convenient means of storing value. When acting as a medium 
of exchange it circulates back and forth in the 
Vaiue^^^ same locality^ and may sometimes return to the 

same person^ but at times a person desires to con- 
dense his wealth into small space and perhaps transport it to a 
distant country^ or hoard it away for a time. Money in the 
form of the precious metals affords a convenient means of doing 
this. It is true that other commodities of small bulk^ imperish- 
able quality^ and great value^ such as diamonds or other precious 
stoneS;, might be used for hoardings and sometimes are^ but 
their value is not affixed or stamped thereon^ and their future 
value may not be uniform or stable. Gold coin is an exception- 
ally convenient means of hoarding or transporting money^ and 
the facility with which it can be hoarded has a manifest tendency 
to beget economy and encourage accumulation^ especially among 
the industrial classes. The large number of savings banks 
throughout the United States^, with their enormous total of de- 
posits and millions of depositors^ is largely the effect of frugality 
and saving caused by the facility which the precious metals 
afford for hoarding or storing value. 

Subsidiary coin or "token money" may be defined as coin^ 

the nominal value of which as money is greater than its value 

as metal^ even making allowance for the cost of coinage. When 

the government in 1831 changed the legal rate of 

Subsidiary ^j^^^^ ^^ ^^j^ ^^^^ ^^ ^^ ^ ^^ ^^^ ^^^.^ ^^ ^^ ^^ ^^ 

making sixteen grains of pure silver equal to one 
of pure gold^ the silver dollar then became of greater value than 
the gold dollar by 2^ cents. Naturally people preferred to 
pay their debts in the cheaper metal, gold, and silver ceased to 
circulate. People who had silver on hand either converted it 
to other uses or sold it to brokers who melted it into bullion 



TOKEN MONEY. 157 

and exported it to other countries where its full value could be 
realized. AVe were then without silver for fractional currency, 
except worn halves, quarters and dimes which had lost 2| per 
cent, of their value by abrasion, and hence were equal in value 
to so many cents in gold. Then the increased supply of gold 
from California in 1850 caused a still further advance of If 
per cent, in the price of silver, driving still more of the white 
coin out of the country, and causing the remaining coins to be 
still lighter and smoother. To remedy this difficulty and supply 
the country with silver for fractions of a dollar, Congress in 
1853 passed a law providing for the coinage of 
Law of 1853 new silver half dollars, quarters, dimes and half 

dimes about seven per cent lighter than the former 
ones. There being no inducement to melt these coins into 
bullion or export them, they circulated at par with gold (except 
during the suspension of specie payments), although their 
metallic value was considerably less than their nominal value 
as silver. This was the beginning of silver as subsidiary coin 
in the United States. 

The price of silver continued to fall, as compared with gold, 
until 1871:, but during all of this time no silver dollars were in 
circulation, silver being worth more than gold. In 1873 Con- 
gress passed an act demonetizing silver. The 
of^suveV^^ ^°" metal in the silver dollar at the time of the pas- 
sage of the demonetization act was worth two 
cents more than a gold dollar, but the price of silver has since 
continued to decline until it has become worth less than half 
its nominal value*. It now circulates freely as subsidiary coin, 
since the amount of silver coined and in circulation is limited 
and it is receivable for all public dues. Eeceiving it for public 
dues is one wav of redeemino^ the coin. Besides silver we 



♦Congress passed an act in February, 1878, remonetizing silver, but not- 
withstanding this its value has continued to fall, and it only circulates at 
its nominal value because the Government receives it at the equivalent of 
gold at the custom house and tax oflSce. 



158 MONEY. 

have subsidiary coin in the form of fractional currency^ consist- 
ing of copper and nickel. These are redeemable by the govern- 
ment in gold when presented in sums of twenty dollars or more. 

Paper money consists of printed promises to pay a given 
sum of money to the holder on demand. It is the government's 
promise to pay. It is not money^ in reality, but 
Paper Money represents money, and circulates instead of the 
actual coin. We call it money because it circulates 
from hand to hand and performs some of the functions of 
money, and because it will purchase our wants the same as 
money. It is redeemable or convertible into actual money on 
demand, and is issued either directly by the government or by 
banks under the authority of the government. There are 
several important advantages in favor of the use of paper money. 
It is lighter than coin and hence more convenient to carry in 
the pocket. Coin loses by abrasion, but paper can be readily 
replaced with new. Paper money can be sent through the mails 
or transported by express much more easily than coin. 

Paper money may be divided into two kinds, distinguished 
on account of the origin of each, viz.. Fiat Money and Eepresenta- 
tive money. These may be further subdivided as follows: 

Greenbacks 



Paper 
Money 



[ Gr 

} Tr 

( Na 



^ Fiat -^ Treasury Notes 

National Bank Bills 

-^ , ,. (Gold Certificates 

Representative -< ^.^ r^ ^-n i 
^ ^ I Silver Certificates 

Fiat money consists of promises to pay by the government 
direct, or by banks under authority and control of the govern- 
ment, founded upon the faith of the people in the 
Fiat Money stability and credit of the government. Such 

bills are issued under a special law which limits 
the quantity, pledges the government to redeem them in gold 
on demand, and provides for a sufficient reserve fund of gold 
coin, to be kept on hand to redeem the bills in circulation. 



GRESHAM'S LAW. 159 

The advantages of fiat money are that it enables a nation 
to increase its circulating medium rapidly^ or temporarily, with- 
out increasing its stock of precious metals. The increase in the 
volume of coin must necessarily be made slowly, as the metal is 
mined and coined, but the demands of trade or the exigencies of 
war may require an increase in the volume of the money of the 
country to be made quickly. Now it has been found by experi- 
ence that where public confidence in the government remains 
unshaken, a reserve of one dollar in coin is a sufficient deposit 
to maintain a circulation of three dollars in paper, on the prin- 
ciple that all the bills will not be presented for redemption at 
one time. 

From the foregoing it must not be inferred that the govern- 
ment can create value or make as much money as it chooses. 
Government '^^^ government can no more create value than it 
Cannot Create can Create gold or coin. It may say how many 
grains of gold shall constitute a dollar or how 
many pounds shall constitute a bushel of corn. It may decree 
that a quantity of gold coin or bullion shall be deposited in the 
national treasury and it can, within certain limits, issue its paper 
promises to pay, representing this real money, but this is the 
extent of its power. If it exceeds this limit, and at times there 
have been strong temptations to do so, the result is inflation. 
The money begins to depreciate and falls below par. It circu- 
lates only at a discount, and cannot be exchanged for real money 
except at a loss. The people lose faith in it. Gold is driven out 
of circulation by it, because, according to the law of values 
announced by Sir Thomas Gresham three centuries ago, called 
'"Gresham's Law,^' the cheaper money always drives out the 
dearer, people preferring to pay their debts with the cheapest 
money which their creditors can be induced, or by law compelled, 
to accept. 

As seen from the foregoing, fiat money may be redeemable 
in coin, that is, it may be ^^convertible^' into gold at the will of 



160 MONEY. 

the holder^, or it may be founded only on the faith of the people 
in the stability of their government^ or ^'^inconvertible/^ The 
Convertible former is a convenience and aid to commerce, be- 

and inconvert- causc it incrcascs the circulating medium without 
otes impairing its stability. The latter is inflation 

and brings in its train serious financial and industrial dangers. 
Eepresentative money consists of certificates of deposit issued 
by the government for gold or silver deposited in the treasury. 

These certificates circulate as money instead of the 
Mon^ey^"*^*^^^ ^^^^ which they represent. The coin can be had 

by the holder of the certificate upon demand. The 
representative money of the United States consists of gold cer- 
tificates and silver certificates. The theoretical difference be- 
tween these and greenbacks or treasury notes is that the latter is 
issued in excess of the redemption fund on which they are based, 
while gold and silver certificates can never exceed in amount 
the coin on deposit. 



CHAPTEK XVI. 

THEORIES OF MONEY. 

COINAGE; VOLUME OF MONEY; SUBSTITUTES; MONOMETALLISM; 

BI-METALLISM. 

Coinage is the process of manufacturing bullion into money 
of proper form^ weight and fineness. This is done only by the 
government^ at its mints. Private individuals are not permitted 
to coin money^ owing to the inducement which 
FuncriorT'"^" would cxist for the practice of fraud and the ease 
with which it could be practiced. In ancient times 
kings (notably Henry VIII^ the first Defender of the Faith) 
debased the coin of the realm and thus cheated their subjects 
to enrich themselves^, but in modern times money is as accurately 
coined as human skill is capable. 

Gold and silver circulate between different countries by 
weighty simply as merchandise^ the risk of being defrauded by 
inferior quality or adulteration being left entirely to the receiver 
of the metals^ but in domestic commerce the majority of people 
have not the skill nor facilities for weighing or determining the 
value of coin received in every transaction^ hence the enormous 
convenience to have each coin certified as of proper weight and 
fineness by the highest authority. 

Within the sphere of the subject of coinage Congress must: 
1. Fix upon the metal to be the standard of legal money. 2. Es- 
Dutiesof tablish a unit of value. 3. Fix the weight and 

Congress as fineucss of the uuit and of other pieces^ its frac- 

oinage tious and multiples. 4. Choose proper inscrip- 

tions for the various coins. 5. Determine the weighty, fineness 
and value of all coins of other metals used as money, compared 
with the standard. 6. Decree how much money shall be coined. 
In passing upon these questions at different times, our Congress 

161 



163 MONEY. 

lias finally established gold as the standard^ one dollar as the 
unit, 25.8 grains as the weight, and nine-tenths pure as the 
fineness, and made its coinage free and unlimited; that is to 
say, all who bring gold bullion can have it coined by paying the 
mint charge, or seigniorage. Congress has decreed that a silver 
dollar shall consist of 412^ grains of silver nine-tenths pure, 
and that its coinage shall be restricted.* 

It is customary to attribute most of our financial ills, such 
as depression in trade, ^^hard times,^^ lack of employment and 

low prices to a scarcity of money, and to believe 
Money^ ^^^^ relief lies in starting the mints to work or 

the printing presses to turning out bills. With a 
desire to be useful to their constituents our legislators often 
undertake to cure the afflictions and poverty of the people by 
tampering with natural laws in the financial world, with the 
result, however, that they only aggravate the difficulty. The 
question then properly rises, how much money does a nation 
really need? To answer this is exceedingly difficult, since a num- 
ber of elements enter into the problem, some of which are very 
difficult to ascertain. First of all, the volume of money which 
a nation needs will depend upon the size of its population, since 
the greater the number of persons engaged in trade the greater 
the amount of money required to conduct that trade. Then 
again the amount of money must depend to a considerable extent 
on the commercial activity of the people. A highly organized 
nation will require more money per capita than one of fewer 
activities. The more business done, goods manufactured, bought 
and sold, the more money a people will require as an instrument 
of trade and commerce. The value of the goods also will affect 
the question, and the higher the price of the goods the more 
value changes hands, and hence the more money will be required 
to represent that value and affect its changes. Now the 



♦At this point let the student ascertain what amount of silver Is now 
being coined and under what restrictions. 



VOLUME OF MONEY. 163 

amount of a nation's foreign commerce is easily ascertained 
since it must pass through the ports of entry^ but the volume 
of inland traffic^ the innumerable transactions carried on be- 
tween citizens of the same country (and this is by far the larger 
part of a nation^s commerce) cannot be estimated accurately. 
Hence some of the data which enters into the question of the 
volume of a nation's money cannot be supplied. 

It is also apparent that the rapidity with which money cir- 
culates has an important bearing upon the question of volume. 

A ''^nimble penny" will do more business than a 
cfrcuiation sluggish dime. A dollar which changes hands ten 

times serves as a medium of exchange equal to ten 
dollars in one exchange. In these days of quick transportation 
of goods and rapid interchange of commodities and information 
among the people, the volume of money would necessarily need 
be very large were it not for the substitutes which have been 
devised to take its place. 

The substitutes for money in a modern, highly civilized 
nation are checks, drafts, money orders, certificates of deposit 
and promissory notes. These are representatives of money, and 

by their use an immense volume of business is 

Substitutes for ■ x ^ -j-i, x j-i, i jt £ i 

Money transacted without the handling of any real money. 

The general intelligence of the people by means 
of which they are able to properly and safely use the various 
forms of business papers, an extensive banking system by which 
every town of any importance is provided with banking facili- 
ties, the bank clearing houses in all of our large cities whereby 
the exchanges between banks are effected with the use of but 
a very small fraction of actual money — all these, the machinery 
of finance — combine to reduce the need for a large volume of 
the circulating medium. 

The average daily transactions in the Bank Clearing House 
of London is £34,000,000 which if paid in gold coin would 
weigh about 364 tons^ and would require fifty heavy, two-horse 



164 MONEY. 

drays to transport it. If paid in silver it would weigh 5^150 
tons. The clearings in the New York Clearing House average 
daily about $250^000^000, and yet this vast volume of trans- 
actions is settled by the use of less than 5 per cent, of the 
amount in actual coin or legal tender notes^ and even this 
amount, except for sums less than $5,000, is often paid by means 
of clearing house certificates. 

When business is prosperous, that is when a large volume of 
sales are made or goods manufactured, so that a greater quantity 

of money is required to carry on the commerce of 
Self-Regulating the couutry, gold is attracted from abroad, and 

like other commodities, seeks the place of strongest 
demand. Like water, it seeks its level. On the contrary, the 
history of the past teaches us that w^hen trade slackens and a 
smaller volume of the circulating medium only is required, if 
the several kinds of money are founded on gold as a standard, 
or are redeemable in gold, there will be an outflow of gold until 
the excess is relieved. But if on the other hand the circulating 
mediums are not upon a gold basis but are in the nature of fiat 
money, there will be a general depreciation of the whole volume 
of the currency. Thus the law of supply and demand affects 
to a certain extent the quantity as well as the value of a nation's 
money. Then again the volume of money in circulation affects 
the prices of all other commodities. A scarcity of gold means 
low prices of all commodities measured by gold, because the 
scarcity of any commodity makes it dearer, and the dearer gold 
is the greater its purchasing power — the more things it will buy. 
And the more plentiful gold is, or other money equivalent to 
or redeemable in gold, the lower will be the prices of all other 
commodities, because money will be cheaper, and will purchase 
less. Fluctuations to any considerable extent in the volume and 
value of the money of a country, especially if sudden, must 
necessarily be very injurious to the welfare of the people, because 
they unsettle values and make the future of time contracts 
uncertain. 



MONOMETALLISM. 165 

From the foregoing we may conclude that the volume of a 
nation's currency is not necessarily a measure of its wealth, 
and that the wisest and safest method of regulating the amount 
of money in circulation is to leave it perfectly free to follow the 
inevitable laws of supply and demand. As a nation grows 
older its laws more stable, wise and just, it will attract money 
from other nations, as well as add to its supply by the product 
of the mines, and its volume of money gradually increases to 
meet the requirements, the same as the amount of wheat or 
cotton raised. 

Monometallism consists in fixing upon a single metal as the 
standard of value. The two metals chiefly used as money are 
gold and silver. Of these silver is more widely 
Monometallism and plentifully distributed than gold. It is usually 
formed in larger deposits and is more easily mined, 
hence its value is much less than that of gold. If the relative 
commercial values of the tvv^o metals would always continue 
precisely the same, the government could ascertain that value 
and fix the legal ratio accordingly, but the production of the 
two metals does not continue uniform, and hence their values 
are subject to change. An increase in the output of silver or a 
decrease in the production of gold, or vice versa, causes the com- 
mercial values of the two metals to fluctuate and thus change the 
actual or commercial ratio between them. N"ow, according to 
Gresham^s Law^, as before explained, when two metals are legal 
tender, and one is cheaper than the other, the cheaper invariably 
drives the dearer out of circulation, because a debtor will always 
pay in the cheapest coin which his creditor is compelled by law 
to receive. 

From the establishment of our coinage system in 1792 until 
1873 gold and silver were both legal standards of value, coined 
in unlimited quantities. The ratio from 1792 to 1834 was 15 
to 1, but since the commercial value of silver was slightly below 
this ratio, gold was gradually driven out of circulation and so 



166 MONiEY. 

continued almost without interruption until in 1834. In 1820 
Mr. Eaguet wrote to the ^^National Gazette^^ to explain the reason 
for "^"^the disappearance of gold from the United States.^^ Two 
years later he wrote on the same subject^ saying that ^^although 
the coinage of gold continued to be large ($1^,319^030 in 1820) 
not a gold coin was anywhere to be seen in circulation.^' The 
gold was exported as fast as the mint turned it out with its 
weight and fineness fixed. To change this state of affairs Con- 
gress in 1834 changed the ratio to 16 to 1. This ratio over- 
valued gold and thence it became the cheaper money. Silver 
w^as driven from our shores^ and fractional coin was kept in cir- 
culation only by making the half dollar^ quarter dollar and 
dimes short in weight. In 1873 silver was demonetized^ leaving 
gold as the sole standard, and reducing silver to the position of 
subsidiary coin. In this capacity it now circulates with gold. 
The argument of the monometallists is that in no other way can 
both metals be kept in circulation than by making one a standard 
and the other subsidiary coin. History seems to support their 
contention. 

England adopted the gold standard for herself and her colo- 
nies;, including Australia, in 1816. Germany demonetized silver 
sjj^gig and went to the gold standard in 1871. Her ex- 

standard ample was soon followed by Denmark, Norway and 

^ ^°"^ Sweden. The gold standard also exists in Portu- 

gal, Turkey, Egypt and a few South American states. The silver 
standard prevails in Russia and Austria in Europe; China., India, 
Central America and Mexico. 

Bi-metallism means the use of two metals, gold and silver, 
as standards of value. Those who advocate bi-metallism contend 
that there is not sufficient gold to supply the 
Bi-metallism moucy uccd of the world, and that if the gold 
standard were universally adopted it would cause 
a gold famine which would be exceedingly disastrous to the 
financial welfare. It is further contended that by placing the 



MONOMETALLISM AND BIMETALLISM. 167 

entire burden as a standard of value upon one metal the use and 
importance of that metal is accordingly augmented and its value 
increased, causing a corresponding decline in the values of all 
other commodities. 

But the strongest argument in favor of the double standard 
is that one metal acts as a check upon the fluctuations of the 
other. If two metals are equal as money standards, and one, 
for instance gold, should rise in value, this would bring the 
cheaper metal into more active use, thereby relieving the pressure 
on gold, or lessening the demand for it, and causing it to fall. 
Likewise if silver should become dearer, gold would be more 
extensively used in making payments instead of silver, thus 
bringing the two metals nearer an average of value and main- 
taining that uniformity which is so important as a measure of 
value. The bi-metallists contend that the uniformity of value 
of our standard is of far more vital importance than having the 
two metals circulate together, and that the lack of one metal in 
circulation can be supplied by other forms of money if necessary. 
The question may yet be regarded as an unsettled one among 
nations, with the tendency principally in the direction of the gold 
standard. The countries now having the double standard are 
France, Italy, Belgium and Switzerland, constituting what is 
known as the ^'Latin Union,'^ Spain, Greece, and a few South 
American states. 



HISTORY OF BANKING. 



CHAPTEE XVII. 

PRIMITIVE BANKING. 

BANK OF VENICE; AMSTERDAM; WISSELBANK; BANK OF FRANCE; 

FRENCH SYSTEM. 

Bankings as we understand the term^ had its origin in the 
Italian cities during the middle ages. Prior to that time ^*^bank- 
ers'^ were merely money changers^ who set up their banks or 
benches in the streets or market places of the cities of the Orient. 
Money changers were numerous in the cities of Greece and 
Egypt. They kept no books^, received no deposits^ made no loans^ 
sold no drafts or bills of exchange and issued no circulating cur- 
rency, hence they scarcely possessed any of the real functions 
of a bank. But when prosperity came to the cities of Italy, 

and their ships were upon every sea, the merchants 
Bank of Venice fouud need for othcr and better facilities in their 

financial operations, and hence was gradually de- 
veloped the first banking institutions. The first bank, however, 
that of Venice, had a peculiar origin. It was founded in 1171 
as a combined result of governmental necessity and tyranny. 
The republic needed money to carry on its wars with Genoa, 
and levied forced contributions upon the leading mercantile 
firms and wealthy citizens, in return for which they were given 
perpetual annuities at a fixed rate per annum. The payment 
of this annual interest was the means of establishing the bank, 
and as the annuities were often transferred from one holder to 
another, or passed by devise or descent to heirs, the transfer was 
made upon the books of the bank, the same as in the case of the 
transfer of the stock of a corporation at the present time. 

168 



AMSTERDAM. 169 

Finally, to avoid the frequent and numerous entries on the books 
of the bank, certificates payable to bearer were issued and passed 
from hand to hand, the same as bank bills of the present day. A 
little later bills of exchange were introduced as a means of 
transmitting money safely through provinces where property 
was unsafe from robbers and barbarians, but it was not until 
three hundred years later (1487) that the system of banking thus 
begun had developed to the point of deposit banking, and the 
issuing of circulating notes by this same bank. The Bank of 
Venice played a great part in the commercial history of its time, 
proving a vast aid to both the government and the mercantile 
houses, and yet it answered very imperfectly the modern defini- 
tion of a bank. 

During the sixteenth and seventeenth centuries the commerce 
of Holland supplanted that of the Italian cities, and Dutch ships 
were carrying the produce of the world. Amsterdam then 
became a commercial and financial center. For a time the com- 
merce of the world seemed to focus there. Foreigners came to 
buy, and found the products from all parts of Europe, Asia 
and the East Indies, carried thither in Dutch ships. Money 
Amsterdam as Aowcd iuto Amsterdam from foreign countries in 
a Financial payment for goods and shipping charges, and this 

stream of payments made it convenient to settle 
in Amsterdam the financial transactions of other cities, such 
as Antwerp and Eotterdam. Thus Amsterdam became a com- 
mercial clearing house for the world^s commerce, the same as 
London and Xew York are at the present time. Bills of ex- 
change came into Amsterdam for collection, and the volume of 
financial transactions rose to a large figure. Such a concentra- 
tion of dealings in money could not fail to develop a convenient 
system of banking. "Individuals began to deal in foreign ex- 
change and to buy and sell coin and bullion; and, sometimes in 
connection with the exchange business, and sometimes inde- 
pendently of it, began to receive money on deposit, and to effect 



170 HISTORY OF BANKING. 

payments^ when ordered by customers^ by transfer from one 
account to another/^ Thus the business of banking gradually 
developed to meet the requirements of commerce until by the 
middle of the seventeenth century it is probable that many of 
the functions exercised by a modern bank were in use^ except 
the issuing of a circulating currency. 

A great variety of coins were in use in the different Dutch 
provinces^ and to these was added the influx of gold and silver 
Establishment of various Weight s and values from other nations 
Amsterdam ^ ^^ ^^^ regular coursc of foreign commerce. The 
1609 rixdaler was the standard of value^ but a large 

portion of the coins in circulation was light in weighty either 
from abrasion^ clipping or debasement. Kings were accustomed 
to debase the coinage in order to replenish the public revenues. 
As a consequence the coins of full weight disappeared con- 
stantly^ leaving the inferior pieces in circulation. Instead of 
attempting to regulate the coinage itself, the city fathers of Am- 
sterdam ascribed the confusion in the circulating medium to 
the free banking privileges which prevailed, and attempted to 
correct the evil by regulating the dealings of private bankers. 
Their first law was leveled against deposit banking, and by the 
act of July, 1608, deposit holding was absolutely prohibited, and 
the receiving or paying out of money for another person, or its 
transfer by writing, ^^or by word of mouth, directly or indirect- 
ly^^ was forbidden. The use of bills of exchange was also strictly 
forbidden. The culling of coin, or selecting the heavy coin 
from the light was also strictly forbidden. Thus did these ancient 
law makers display their ignorance of the laws of trade and 
finance, and while attempting to correct evils which they did 
not understand, only served to retard the wheels of commerce. 
Finally they decided to create a great financial institution, which 
should concentrate under public authority the business of receiv- 
ing deposits and dealing in specie, and as a result, in 1609, was 
established the Bank of Amsterdam, more properly called the 



WISSELBANK. Hi 

Amsterdam Wisselbank (i. e. Amsterdam Exchange Bank). The 
bank created several agencies or branches in different parts of the 
city, and thus, under the law, monopolized the business of bank- 
ing and dealing in money and exchange. 

The advantages offered by the Wisselbank to the commercial 
world, of which Amsterdam was the center, were security for 
deposits and a uniform value in its transfers; and while the 
multitude of debased coins continued to circulate in the chan- 
nels of trade the same as before, the deposits in the bank were 
a standard of value. The bank received only money of full 
weight and paid out only such, hence a credit 
the^Bank^^^° upou its books was equivalent to so much good 
coin. Credits in the bank were frequently trans- 
ferred, and came to be called ^'bank money.'' Payments made 
in "bank money^^ were preferable to payments made in "current 
money,^^ owing to the established value of the former. Such 
payments or transfers were made by means of orders required 
to be presented by the payee in person, or his authorized agent, 
but the payee did not receive the credit for the transfer until 
the following day. This is the first exemplification of the 
check system, but it fell far short of its modern uses. Even this, 
however, was a great convenience to the commercial public. 
The law required that all Bills of Exchange payable in Amster- 
dam should be settled for by transfers in the bank, and this had 
the advantage of assuring foreign holders that exchanges on 
Amsterdam would be paid in standard money, thereby giving 
stability and uniformity to exchanges and encouraging foreign 
trade. 

Every merchant was obliged to keep an account with the 
bank in order to pay his foreign bills of exchange, and once 
having made a deposit it was to his advantage to continue it, 
because the moment he withdrew his money and mingled it with 
the current money in trade, from which it was not readily 
distinguishable, it fell in value to the level of the current 



172 HISTORY OF BANKING. 

money. ^^While it remained in the coffers of the bank its su- 
periority was known and recognized^ but when it came into the 
hands of private individuals^ its superiority could 
Advantages of ^^^^ ^^|| ^^ ascertained without more trouble than 

a Deposit 

the difference was worth^' (Adam Smith in 
Wealth of Nations). The difference in value between money in 
bank and current money sometimes reached as high as nine 
per cent.^ but was usually about four per cent.^ and this (called 
the agio) the depositor lost by withdrawing his deposit. 

In 1683 the bank established a system of making advances 
upon deposits of coin. Under this system a depositor was 
allowed to withdraw an amount of bank money not far from 
the value of the specie^ and upon this he was charged interest. 
These advances were commonly made for a period of six months^ 
and in case the borrower failed to renew or pay the loan at 
maturity^ the margin of his deposit over and above the amount 

of his withdrawal was forfeited to the bank. The 

Advances on i • pi ' i '± 

Deposits business ol advances upon specie deposits grew m 

the eighteenth century to an enormous volume, 
and completely superseded the earlier practice of simple deposit. 
Then the administrator of the bank began to permit individuals 
at times to transfer more bank money than their deposits of 
specie warranted, which was equivalent to giving permission to 
overdraw. 

Mismanagement and a diminishing commerce are the causes 
which, after two hundred years of useful services, led to the 
decline of the Wisselbank. Wars and the growth of manufact- 
ures had changed the channels of trade, and Dutch ships no 
longer possessed a monopoly of the carrying business. The 
center of the financial world moved westward to 
Bank° ^ London, and the Bank of England was coming 

into prominence as a great financial agent. Be- 
sides there had come about a desire for an improvement in 
the system and methods of banking to conform more to the 



BANK OF FRANCE. 173 

requirements of commerce, a larger scope in bank functions, 
and the Bank of England was more in conformity with this 
idea. The Wisselbank was finally dissolved and went out of 
business in 1819. The present Bank of the Netherlands, which 
may be considered its successor, was founded in 1814 with 
authority to make loans upon commercial paper and other public 
securities. It is also the bank of issue of the currency of the 
Netherlands, and keeps the funds of the state and the cash of 
the postal savings banks. There is no limit upon the circulation 
of the bank, but the law requires that it must be secured by a 
reserve of two-fifths of the aggregate of the circulation and 
demand liabilities. This reserve consists chiefly of gold. 

The Bank of France was established in 1800, the First 
Consul being one of its original stockholders. In 1803 its scope 
was enlarged and it was endowed with the exclusive privilege in 
Paris of issuing circulating currency, a monopoly which was 
finally extended so as to cover the whole of France, and which 

it still enjoys. In some respects the bank is the 
of France greatest of financial institutions, and enjoys a 

reputation for solidity at home and abroad. While 
the Bank of France is the only one of issue, there are numerous 
private banks in Paris and scattered throughout the country 
which do a general deposit, discount and exchange business. 
The capital of the bank is 182,500,000 francs, and its circula- 
tion limit is 5,000,000,000 francs — the greatest of any financial 
institution in the world. While nominally a private banking 
house, the Bank of France is really a semi-official institution, 
for the reason that, being a monopoly, its operations are. under 
government control. The management of the bank is vested in a 
board of fifteen regents and three inspectors or auditors, but the 
governor and two deputy governors are appointed by the Cham- 
ber of Deputies. Only the 200 stockholders who hold the 
largest number of shares are allowed to attend the annual meet- 
ing and participate in the election of officers. French states- 



174 HISTORY OF BANKING. 

men believe that private ownership of the bank is an advantage, 
since it and the government have thus been enabled to be of 
assistance to each other at various times, in financial and politi- 
cal crises. M. Thiers said, "The bank saved us because it was not 
a state bank/^ by advances when the government was hard 
pressed, as in 1871. On account of its issue of the circulating 
medium, the impression prevails among the uninformed people 
of France that the bank is a government institution, and it is 
respected as such, but business men know that while this is not 
the case, the government could not allow it to fail, and that 
behind it is the fortune of the nation. The note issue is regu- 
lated by law, and has been gradually increased until it has 
reached its present enormous volume. 

The functions of the bank as prescribed by law are: "To 
issue bank notes payable on demand; to discount bankers' drafts 
and commercial bills, drawn at a fixed period not exceeding 
three months and bearing the names of business people and 
others well known to be solvent; to collect bills remitted them 
by private piarties or public establishments; to receive in account 
current sums for deposit with the bank by private individuals or 
public institutions, and to pay amounts drawn to the extent of 
the funds deposited; to keep a record of voluntary deposits of 
all securities, bullion and all kinds of gold and 
the^Bank^^ silver money; to make advances upon French bills 

and French securities, upon bullion and foreign 
coins, in accordance with a certain proportion fixed by law and 
the terms fixed by the statutes of the bank; and, finally, to deliver 
to any person applying therefor orders from Paris to their branch 
offices, and orders on Paris from the branch offices.'^ 

The bank does an extensive business in discounting short 
time commercial paper, according to the above-mentioned regu- 
lations, but its business in this line is considerably hampered 
by its rule which requires three names to each paper. This 
compels many merchants to discount their paper through brokers 



BANK OF FRANCE. 175 

or private bankers, who, after endorsing it, re-discount it in the 
Bank of France. 

To satisfy the demand for banking facilities in the provincial 
towns of France, the bank is required to maintain in each 
department (equivalent to a state) in the republic, a branch with 
a capital allotted to it by the parent institution in Paris. These 
branches, which now number more than one hundred, are con- 
ducted under the supervision of the head bank, and can engage in 
no operation w^ith other banks or with each other without special 
leave. Their business, even to the rate of discount, is directed 
in Paris, and not with reference to local wants. The local 

managers are frequently strangers sent from Paris 
Branch Banks and are not in close sympathy with the business 

public. Nevertheless the branch banks discount 
a large amount of commercial paper, besides issuing bills of 
exchange, collecting government revenues, stamp duties, etc. 

The note issues of the Bank of France are regulated by law. 
The volume has been increased from time to time until now the 
limit is 5,000,000,000 francs, with an actual circulation of about 
3,600,000,000. This large circulation of the bank is, according 
to Conant, in a measure due to the large quantity of silver in the 
reserve of the bank. The bank has made repeated and continu- 
ous attempts to force its five franc pieces into general circulation, 
but they constantly and persistently flow back to the bank, the 
people preferring paper currency based upon the gold and silver 

reserve in the bank vaults. The circulation of the 
Notes ***°^ bank is divided into two classes, denominated as 

'^productive'^ and ^^non-productive.^^ Notes issued 
to meet the demands of commerce, and which are secured by 
discounted bills, are called productive, probably for the reason 
that interest is earned, and are subject to a tax of 50 centimes 
per 1,000 francs, w^hile those issued against specie or bullion are 
called non-productive, and pay a tax of 20 centimes per 1,000 
francs. As soon as a bank note passes into circulation it is a 



176 HISTORY OF BANKING. 

legal tender for all debts, public and private, so long as the bank 
maintains specie payments. They are guaranteed by gold or 
silver coin, by loans made upon gold or silver bullion, by securi- 
ties or public funds, by loans made to the government, or by 
drafts discounted upon the terms prescribed by law. 

The Bank of France has the option of redeeming its notes 
in either gold or silver, and it does it in whichever metal seems 
most advantageous at the time. In case a note-holder desires 
gold when silver is offered him, or vice versa, the bank exacts 
a small premium, as a compensation for paying in the other 
metal. It has been the policy of the bank to keep on hand a 
large gold reserve and prevent the exportation of the yellow metal 

as far as possible. This has been done by charging 
o/nous*^°" a premium on gold for export. The gold reserve 

in the Bank of France is, in round numbers, 
2,500,000,000 francs, or about one-half the authorized limit of 
circulating notes. The silver reserve is in the neighborhood of 
1,000,000,000 francs. There is no law fixing the amount of coin 
reserve, or proportion of specie to be held against the notes in 
circulation. In a time of crisis the government can give the 
notes of the bank a forced circulation, in which case the bank 
would be relieved from the necessity of redeeming its notes in 
coin. 

The enormous volume of the circulating medium of France 
is necessitated to a considerable extent by the fact that it is a 
country of small traders, as well as small farmers, and the 
minute division of properties and enterprises - is not favorable 
to the use of bank checks to the same extent as in countries 

where industries are more consolidated and cen- 
MoneT° tralized. Then again the masses of the French 

people are not educated in the use of checks, or 
accustomed to their use as we are, and are conservative in their 
habits in regard to changing long-established methods, and hence 
adhere to the old way of using the actual coin or bank notes. 



FRENCH BANKING. 177 

The French people^ therefore, require a large amount of cash 
for the transaction of their daily business, and accordingly we 
find that France has the largest volume of both gold and silver 
as well as paper money, in proportion to the population, of any 
of the great nations. 

The banking of France is remarkable as an example of the 
free organization of a financial system under general laws, and 
without those restrictions and provisions for the safety of all 
bank debts, especially circulating notes, which in other countries 
has come to be regarded as essential to a stable currency. 
Here is a great bank authorized to discount paper, receive de- 
posits and issue circulating notes, but without any special pro- 
vision for the safety of one class of liabilities rather than an- 
No Special Lia- other. All liabilities of the bank are upon the 
biiity for Note same footiug and equally a charge upon its gen- 
eral assets. The Bank of England existed in this 
manner until 1844, and banking in the United States was con- 
ducted under the same condition up to the period of our National 
Banking Act, but in both these latter countries public opinion 
has required important modifications in the law for the safety 
of creditors and note-holders. 



CHAPTEE XVIII. 

ENGLISH BANKING. 

BANK OF ENGLAND; PEEL'S ACT, 1844; ONE RESERVE; BANKING 
AND ISSUE DEPARTMENTS. 

After the industrial revolution which set in during the latter 
part of the eighteenth century^ England took first place^ com- 
mercially^ among the nations of Europe^ and London became the 
hnancial capital and center of her growing commerce. As the 
trade of Amsterdam declined^ that of London increased^ and as 
wealth accumulated;, England gradually became a creditor nation^ 
London as loaning and investing extensively in various parts 

a Financial of the world. She is at the present time the great 

creditor nation of the worlds loaning through the 
bankers of London large sums to foreign governments and citi- 
zens. These loans and investments necessitate the return of in- 
terest and dividends to the bankers of Lombard Street^ in the 
aggregate amounting annually to many millions of pounds. 
Many of the largest transactions in the world are settled in 
London^ and the work?s supply of gold there finds its natural 
point of distribution. London has thus become^ practically^ 
the center of the exchanges of the worlds and is not inappro- 
priately called the ^^World's Clearing House.'^ Whether this 
conditon of affairs is due to the general westward course of em- 
pire and commercial development; to the freedom of the British 
Isles from invasion and the ravages of war; to the genius of the 
people for finance and commerce; or to the money system and the 
Bank of England itself;, or all of these combined^ is not easy to 
determine^ but there are many Englishmen who would ascribe 
it chiefly to the Bank of England. Certain it is^ that the 
Bank of P]ngland is the center around which the commercial and 
monetary systems of the Rritisli Empire revolve, and the support 

178 



BANK OF ENGLAND. 179 

of the whole fabric. The Bank of England, although a highly 
privileged establishment, is not a government institution. It has 
practically a monopoly of the note issuing power, and its notes 
are the only legal tender currency of the United Kingdom. It 
is the chief depository of a government which has no public 
treasury. It keeps the registry of the public debt, issues the 
consols and pays the interest thereon, and yet, withal, it is only 
a private corporation, subject to no government inspection or 
control, and managed by a board of directors who are alone 
responsible to the stockholders, the same as in the case of other 
corporations. 

The Bank of England was founded in 1694 in very much the 
same manner as the Bank of Venice — as a result of the financial 
straits of the government. William and Mary were in sore need 
of funds to prosecute the wars against Louis XIV. Their treas- 
ury was empty and their credit weak. The increasing wealth of 
the country since Elizabeth^s reign had been the cause of a large 
number of private banks springing up in London and other parts 
of the realm, each issuing its own notes to whatever extent they 
would be accepted by the public. The necessity for a great 
central bank, similar to that of Amsterdam or the Italian cities, 
was becoming apparent. The government desired a popular 
loan of a million sterling, and William Patterson, a Scotchman, 
crystallized the idea by proposing that Parliament should ask a 
Origin of ^^^^ ^y public subscriptiou, and in order to make 

the Bank of the proposition attractive, include a grant of in- 

"^^" corporation, with banking privileges to be enjoyed 

by the subscribers and their successors. In this way £1,200,000 
was raised at eight per cent, interest, and the subscribers were 
incorporated as the "Governor and Company of the Bank of 
England,^^ with that amount as a capital. 

The bank was to have the privilege of issuing notes, keeping 
the accounts of the public debt, and of transacting a general 
banking business, with almost a complete freedom from restraint. 



180 HISTORY OF BANKING. 

The entire capital was loaned to the government and thus the 
bank had a revenue of nearly £100^000 at the very outset of its 
career. It began at once to issue circulating notes based upon 
the government securities which it held^ another productive 
source of income. These billS;, however, were only 
the°Bank^ transferable by endorsement, like ordinary promis- 

sory notes, and bore interest — two conditions 
which must have confined them to a very limited circulation. 
Three years later the bank was compelled to suspend specie 
payment, and the necessities of the government were such that 
in consideration of the stockholders advancing another million 
pounds to the government the bank's charter was modified. The 
new charter authorized the issue of notes payable to bearer on 
demand, thus laying the foundation for the present system 
of Bank of England notes. It also gave the corporation a mo- 
nopoly of the banking business in the kingdom by providing 
that no other bank, or corporation in the nature of a bank, 
should be allowed to carry on business in the kingdom. The 
rate of interest on the government loan was then reduced to six 
per cent. Further loans to the government and corresponding 
additions to its capital were afterwards made by the bank from 
time to time, until in 1722 its capital stood at nearly nine 
million pounds, with a handsome surplus (called the "Eesf'), 
which enabled its dividends to be made uniform. In 1782 its 
capital had risen to more than eleven millions and a half, and 
in 1816 it had further increased to £14,553,000, or about $72,- 
000,000, at which figure it has stood ever since. Its loans to the 
government increased almost as its capital enlarged, but in 1834 
the government paid about one-fourth, reducing the total to 
£11,015,100, which is its present amount. The interest has 
been reduced from time to time, until it has reached the present 
rate, 2^ per cent. 

The monopoly of the Bank of England, dating, as has just 
been stated, from 1697, was modified in 1742 so as to permit 



BANK OF ENGLAND NOTES. 181 

partnerships having six persons or less to issue circulating notes, 
and allow companies or partnerships of more than six persons to 
perform other functions of a bank. Under this law private 
banks were formed and notes were issued quite extensively dur- 
ing the latter half of the eighteenth century. About the year 
1772 the check system was devised and brought into use, and 
proved such a convenience that many of the London banks 
discontinued the issue of notes. In 1826, owing to the general 
Legislation demand for better banking facilities throughout 

Affecting the kingdom, and the slowness of the Bank of 

England in establishing branches, Parliament 
passed an act giving to companies of more than six persons the 
right of issuing notes, when established at a greater distance 
than sixty-five miles from London, thus limiting the monopoly of 
the Bank of England in territory. Then in 1833 the law was 
again amended so as to permit companies and partnerships, 
although composed of more than six persons, to carry on the 
business of banking in London or within the sixty-five mile 
radius, provided they did not issue circulating notes. This act 
was followed by the formation of numerous joint-stock banks 
in London as well as throughout neighboring towns, and banks 
of issue began business beyond the sixty-five mile limit. The 
London and Westminster Joint-Stock Bank, one of the leading 
banks of London at present, was founded at this time (1835). 

Thus matters progressed until the accession of Sir Eobert 
Peel to the Premiership of England, and the question of the 
renewal of the bank's charter in 1844. The panics of 1811 and 
1825, and the panicky conditions in 1837 and 1839, had aroused 
much discussion, and public opinion was disposed to regard the 
vicious note circulation which had extended rapid- 
01184/ ^ b' ^^^ widely as the cause of these repeated com- 

mercial crises. Prior to the act of 1844 the law 
made no distinction in the bank's liabilities, the resources being 
held equally as security for deposits and the redemption of cir- 



182 HISTORY OP BANKING. 

culating notes. Under this state of aflEairs, if the depositors 
demanded coin to such an extent as to exhaust the reserve there 
would be no coin left for the note holders^ or vice versa. In 
the panic of 1825 the demands of depositors reduced the reserve 
to only a little more than a million pounds^ while there was 
yet outstanding note issues amounting to over twenty-three mil- 
lion pounds. By the act of 1844 Parliament undertook to make 
the notes of the Bank of England secure and limit the issue of 
bank notes of all other banks in the realm. With a stable cur- 
rency redeemable in gold^ Sir Eobert Peel believed that fear and 
distrust;, the bases of panics^, would be banished from English 
commerce^ and panics would cease^ and yet three years after 
the passage of the act (1847) the country experienced a panic, 
and ten years thereafter (1857) one of the greatest financial 
panics ever known shook the English banking and commercial 
world from center to circumference, to be followed in 1866 by 
still a third panic of intense severity. 

By the act of 1844 the bank was divided into two depart- 
ments, viz., the banking department and the issue department. 
The former was to perform the functions of ordinary banking, 
such as receiving deposits, discounting paper, selling or buying 
exchange, etc. The latter was charged with the exclusive issue 
and redemption of circulating notes. These two departments 
of the bank were to be kept as separate and distinct as though 
they were two independent corporations. The issue department 
Division into ^^^ required to hold either government securities 
Two Depart- or coiu or bulliou for all notes issued by it, and 
"^^" ^ since the original provision limits the amount of 

the securities to £14,000,000, it follows that all notes issued 
above that amount must have an equivalent of coin or bullion in 
the vaults of the Bank. Of the £14,000,000 in securities £11,- 
015,100 due by the British government formed a part. The act 
also provided that the Bank might hold silver to the extent of 
one-quarter of its gold, and issue notes against such holdings, 



"PEEL'S ACT" OF 1844. 183 

but this was never done. By another provision of the act^ 
should any other bank, issuing notes at the time of the passage of 
tlie act, discontinue such issue, the Issue Department of the Bank 
of England might increase its holdings of securities to the amount 
of two-thirds of the issue of said retiring bank, and issue its 
own notes against such securities. By this means the Bank of 
England will eventually become the exclusive bank of issue, for 
one by one the joint-stock banks discontinue their issues, and 
cannot resume them, the privilege passing directly to the Bank 
of England. 

The amount of securities held by the issue department against 
which notes may be issued by the bank has been increased from 
time to time by the discontinuance of note issues by other banks, 
until it amounted in 1900 to £17,775,000, and the amount of 
notes issued against gold coin or bullion on hand amounted to 
£27,116,000, making a total of outstanding circulating notes 
£44,891,000. It will thus be seen that the issue department of 
the bank is simply an establishment for the exchange of notes 
Bank of ^^^ buUiou or bulliou for notes. Every Bank 

England of England note outstanding is practically a gold 

certificate, since the bank has gold on hand to pay 
on demand every note that it has put in circulation, except the 
comparatively small portion of the reserve represented by the 
debt, and which is partially covered by the banFs surplus. These 
notes are a legal tender, as long as the bank is able to redeem 
them in gold. By thus keeping a redemption fund of gold in 
the bank vaults sufficient to actually redeem the notes in circu- 
lation, the element of credit is entirely taken out of the circulat- 
ing medium of the United Kigdom, and the note holder knows 
that he can get its face value in gold at any moment. This 
stability of the currency, it was believed by the supporters of the 
Peel Act, would banish all fear from the minds of note holders 
and prevent the hoarding of gold. Since the hoarding of money 
through fear partially causes panics by making loanable capital 



184 HISTORY OF BANKING. 

scarce^, it was contended that when the motive to hoard was 
destroyed panics would cease.* But the panics of 1847^ 1857 and 
1866 were not prevented by the stability of the currency, and 
in fact the panic of 1866 was only allayed by the announcement 
that the Bank of England had authority from the government 
to issue notes in excess of the redemption fund on hand. On 
the worst day of the panic, May 11, 1866, called "Black Friday,'' 
the bank found its reserve in the Banking Department reduced to 
nearly £3,000,000 at the close of business. That evening the 
chancellor of the exchequer recommended that the bank act be 
suspended, and this was promptly done by the government. The 
announcement on the following morning that the Bank of En- 
gland had authority to issue notes beyond the limit to whatever 
extent was necessary, quieted the fears of the people, and affairs 
returned to their normal condition. 

Ordinarily the banking department has no power to borrow 
of the issue department. It may take notes to the issue depart- 
ment and exchange them for gold or vice versa, the same as 
outside persons, but during each of the three panics, viz., 1847, 
1857 and 1866, the government suspended the bank act, and 
permitted the banking department to borrow notes from the 
issue department without depositing gold in exchange. ISTo doubt 
the knowledge of the fact that this has been done in the past 
and will be done again in case future emergencies require it, 
will have a strong tendency to prevent panics in future. 

This suspension of the banking act in case of panic or great 
emergency is the only elasticity of the English currency.t At 

♦Fear is not so much a cause of panics as one of its pronounced features, 
and the hoarding of money through fear intensifies the alarm by depleting 
the cash reserves in the banl^s, and by destroying their lending power for 
the time being, makes ''loanable capital" (which may be actual money, and 
may be only bank credit) scarce. 

tThe suspensions of the bank act under stress of emergencies show the 
unsoundness of the theory or "principle" upon which it rests. Only a 
currency based on credit can have elasticity. Credit can both stretch and 
contract; money cannot, though its volume may vary both actually and 
relatively in any country, nor can it be made to respond automatically to 
the needs of the hour. 



BANK OF ENGLAND. 186 

afl other times there is no expansion to it whatever. Not a note 
can be issued without the gold is deposited in place of it^ and 
hence the total volume of Bank of England notes in circulation 
in the kingdom is dependent upon the amount of gold in the 

vaults of the issue department of the Bank of En- 
^^e Currency gland. Then again^ the system has been criticised 

on account of the large amount of gold which is 
kept constantly locked up and idle^ while it is claimed that a 
safe and conservative reserve could be maintained and still re- 
lease several million pounds of gold now in the vaults which 
could be turned into circulation and productive use. The de- 
fenders of the system say that the act prevents the over-issue of 
notes^ which would be a greater injury than the loss of the use 
of a portion of the gold reserve, and furthermore that the gold 
is the property of the holders of the bank notes, who have ac- 
cepted the notes on condition that they could return them to the 
bank and receive gold for them at any time. The statement of 
this department of the bank May 20, 1903, was: 



ISSUE DEPAETMENT. 

, , ,. ( Government debt £11,015,000 

^'^''J^^^^ \ Other securities 7,159,900 

^ ^ ( Gold coin and bullion 33,407,405 

Besides the Bank of England notes there is a large amount of 
gold and silver in circulation in the United Kingdom, necessi- 
tated by the fact that the Bank of England does not issue notes 
for less than £5. The Scotch banks are allowed to issue notes 
for £1, and a large portion of this circulation is in small denomi- 
nations. 

The sources of profit of the issue department are not exten- 
sive nor numerous. The government pays 2^ per cent, interest 
on its debt (£11,015,100), and interest is received on the other 
securities which the bank holds. In addition to this the bank 
makes a profit on the purchase of foreign coin and bullion 



186 HISTORY OF BANKING. 

brought to it, as it buys gold at the legal price of £3.17s.9d. per 
ounce, and turns it into the mint at a profit of l^d. per ounce. 
The bank also derives a considerable profit from the destruction 
of bank bills. Any bill which is not presented at the bank 
counter in forty years is considered lost and credited to the profit 
account. 



CHAPTER XIX. 

ENGLISH MONEY SYSTEM. 

BANK OP ENGLAND; IMMENSE RESPONSIBILITY AS KEEPER OF 
THE RESERVE; BANK RATES; MANAGEMENT. 

The banking department of the Bank of England is sub- 
stantially the equivalent of an extensive banking house, with all 
banking functions except that of issue. It receives deposits, dis- 
counts commercial paper, loans on collateral and buys and sells 
exchange precisely the same as any other bank. In addition to this 
it acts as the banker of the government, in the management and 
payment of interest on the public debt, the issue and withdrawal 
of Exchequer bills and bonds, the issue of government loans, 
and all other financial operations affecting the government. 
Like other banks it must as a matter of ordinary 
Departmenf prudcuce keep on hand a cash reserve against its 
liabilities. It is bound to meet all its demand lia- 
bilities in cash, consisting of notes or coin, like other banks, and 
if it has need for a greater quantity of notes than that on hand, it 
may procure them from the issue department in exchange for 
gold the same as any other bank. 

Every deposit bank must retain constantly on hand, or 
within easy reach, a sum of legal tender money, equal to a safe 
and proper proportion of its liabilities, in order to meet unex- 
pected demands of depositors. This is a universal rule the 
world over, and is based upon the supposition, which experience 
has shown to be generally true, that all depositors will not call 
for their deposits at the same time, but under disturbed con- 
ditions, an unusual number may make such demands, and the 
bank must at all times be in readiness to meet such calls. This 

187 



188 HISTORY OF BANKING. 

reserve is the safety fund over and above the daily requirements 
of cash to transact the ordinary volume of business^ held by the 

bank to meet extraordinary and infrequent de- 
Reserve mands. The banks all over England keep their 

reserves in London. The same reasons which in- 
duce a merchant to keep a bank account^ viz.^ convenience^ safety, 
etc., act as incentives to a bank to deposit its reserve in whole 
or in part with another bank or banker. In order to conduct 
exchange transactions and have facilities for rediscounting time 
bills, every bank and banker in the United Kingdom, not located 
in the metropolis, find it necessary to carry an account with 
some London bank or banker, and as the latter, as well as the 
bill brokers of Lombard Street, who are really bankers under 
another name, allow interest on such deposit accounts, the result 
is that practically all of the reserve of the country is carried in 
these accounts. "Owing to the fierce competition for practical 
profits,^^* nowhere more severe than in the field of banking, the 
London joint-stock and private banks maintain no coin reserve 
of their own, but deposit with the Bank of England all cash 
not needed for ordinary transactions from day to day. The 
Bank of England does not pay interest upon these deposit ac- 
counts but the willingness of smaller banks to place their re- 
serves in the Bank of England is due to the fact that they are 
relieved of the care and risk of such large sums, and by showing 
their funds in their balance sheets thus deposited they command 
public confidence. Another reason is that the London clearing 
house settlements are made through the Bank of England, which 
practically compels the members of the clearing house to keep 
their reserve cash with that institution. The Scotch and Irish 
banks keep their surplus money in London. A portion of it is 
loaned out or invested in securities and the remainder deposited 
in the Bank of England. It will thus be seen at once that the 
Bank of England holds not only its own reserve, but the reserve 



•Conant, Modern Banks of Issue, p, 130, 



ENGLAND'S BANK RESERVE. 189 

of all London, and not only of all London but of all England, 
Ireland and Scotland. 

This great responsibility of the Bank of England makes it 
the basis of the credit system of the kingdom. Upon the manage- 
ment of the Bank of England depends the solvency or insolvency 
of England, for all business is dependent upon the banks, and 
all banks are dependent upon the one great bank, ^"^The Old 
Lady of Threadneedle Street.^^ While the Bank of England is 
a private corporation carried on for the benefit of 

Immense -l r 

Responsibility its stockholdcrs, who aloue share the profits and 
the ank direct its management, it is in a sense a public in- 

stitution, for to it is confided the safety of the commercial 
public and credit of the kingdom, and it is morally bound in 
time of stress to sustain the entire financial fabric. 

There is no law requiring the bank to maintain a stated re- 
serve in proportion to its liabilities, and since the management 
is expected to earn as large dividends as possible for the stock- 
holders, the tendency would naturally be to reduce the volume 
of idle cash to the lowest point consistent with safety. Like 
other banks, the Bank of England loans out a portion of its 
deposits, consisting largely of reserves of other banks, and the 
effect of this is to cause the reserve to be much smaller in pro- 
portion to the liabilities of all the banks than it would be were 
each bank to hold its own reserve. But the fact that under 
the English system the bank reserve is reduced to a compara- 
tively small proportion of the liabilities is not the only objection 
which can be, and often is, urged against it. This reserve, all 
important as it is, is given over to one board of directors, and 
upon their wisdom its control depends. If they 
One Reserve commit indiscretions the entire financial and com- 
mercial system may be seriously injured. Having 
a smaller balance to meet liabilities, any error in the manage- 
ment of that balance becomes proportionately serious. 

The natural method would appear to be that each bank 



190 HISTORY OF BANKING. 

should keep its own reserve. Each would then be most anxious 
to keep a sufficient reserve^ because its own life and existence 
would depend upon it. The reserve of the entire country would 

then be guarded and controlled by the total banking 
Many Reserves wisdoui of many boards of dircctors^ and the loss of 

interest occasioned by the amount of dead capital 
locked up in the banks as reserves^ would be more than offset by 
the added security. In no other country than England could the 
one reserve system exist as it does there. The system was not 
deliberately founded there^ but grew up as a consequence of many 
events. As the system grew^ confidence in the bank also grew^ 
until the stability of the bank is beyond question and supports 
the system of one reserve. It is the absolute faith of the people 
in the stability of the Bank of England that takes the place of 
a large reserve. 

But the reserve in the Bank of England is subject to a still 
further strain occasioned by the necessities of foreign commerce. 
London is the center of English commerce^ and in case the 
balance of trade* goes against England and in favor of any other 
country^ that balance must be paid by London^ and this is 
equivalent to saying that it must be paid by the Bank of En- 
gland. When^ during our civil war^ the supply of cotton to 
England by the United States was cut off and exports to America 
greatly reduced, immense sums of money had to be sent to 
Australia and Egypt to pay for cotton to keep the looms of 
London the Manchester supplied. Of course no foreigner can 

Clearing House take away the cash of England without giving a 

value therefor, but that value may be in produce 
or manufactures, represented by bills of exchange which the 
foreigner discounts in Lombard Street, and then he may 



*The phrase "Balance of Trade" is usually taken to mean the differences 
between Imports and exports of merchandise, but strictly the balance is 
caused quite as often through movements of capital in the form of loans 
or investments, as of merchandise. These movements not being "visible" 
through the records of the custom houses, are often very diflScult to follow. 



WORLD'S FINANCIAL CENTER. 191 

take away a part or all of the proceeds of his bills in bullion. 
No other city in the world cashes as many foreign drafts as 
London. No other city in the world receives as many remit- 
tances or pays as many drafts as London. No other city holds 
as much foreign money on deposit as London^ for wherever the 
people have payments to make, at that place they must keep 
money on deposit. Formerly Paris was a European clearing 
house to a considerable extent, and divided the business and 
responsibility with London, but the changes in government in 
France have had the effect of greatly reducing the confidence of 
foreigners in the stability of the Bank of France, while the 
volume of mercantile business finding its natural settlement in 
London compelled banks all over the world to keep accounts 
there. As it is more convenient to keep one foreign account 
than several, and most convenient to keep this in the city with 
which transactions are largest and most numerous, there was 
thus placed upon merchants all over the world the effective 
pressure of more favorable exchange rates when bills could be 
drawn upon and payments made in London. Very large banks 
can keep accounts in all the European centers, but it would 
neither be profitable nor possible for small banks to keep such ac- 
counts, because of the amount of cash that would be locked up. 
Moreover the most favorable terms can be obtained upon large 
accounts only, and it is a custom, the world over, except in the 
United States, for banks to exact commissions on all services 
rendered. These considerations have tended to centralize the 
financial transactions in the Bank of England,* which has 
established a record for stability and uniformity of dealing 
through long generations. 

As the commerce of a nation increases the reserve on hand 



♦When the volume of exchanges on some other city, New York, for ex- 
ample, becomes so great relatively, that banks the world over find it cheaper 
to effect settlements there rather than in London, the prestige of London 
must surely begin to wane. There are other factors in the case, however, 
such as the amount of free capital available for discounting time bills of 
exchange, etc., but the foregoing is the chief one. 



193 HISTORY OF BANKING. 

to settle the balance of that commerce must likewise increase. 
A single bad harvest in any important country with which 
England trades, may seriously affect the balance of trade with 
England, by reducing the demand for English manufactures. A 
sudden increase of imports or a cessation of exports causes a 
A Reserve for balance of trade to become due, which must be paid 
Foreign in buUiou. Within a country, paper currency may 

ayments ^^ ^^^^ ^^ Settlement of obligations, but in inter- 

national trade the only cash is metal. The Bank of England 
must therefore keep a reserve which can be used for foreign 
payments either in bullion or legal tender notes which can 
be converted into bullion on demand by passing them over the 
counter of the issue department. The requirements of foreign 
commerce are often sudden and fluctuating, and must be met 
promptly. Therefore it is of the greatest importance that the 
reserve upon which this commerce depends should be both 
ample and ready, at all times, to satisfy the demands upon it. 

Foreseeing the need for an increase in the reserve in anticipa- 
tion of large foreign payments, soon to be made, the question at 
once arises, ^^How are the bank directors to secure the additional 
bullion ?^^ They may reduce the volume of discounts, and this 
would in a measure help to accomplish the purpose, but would 
not afford a sufficient increase in the reserve to meet a large or 
continuous drain on the reserve. They msLj sell securities, but 
in a very large number of instances this would merely mean the 
transfer of a credit from one account to another on the bank^s 
ledger, as the buyer of the securities would in all probability 
be an individual or bank having a deposit account with the Bank 
of England. What then is the means employed to increase the 
reserve? The answer is, raising the rate of dis- 
DLcount count. If the directors of the Bank of England 

vote to raise the rate of discount, it is proved by 
experience that money flows to Lombard Street and from the 
other banks it flows to the Bank of England. Money (i. e, capi- 



FOREIGN SETTLEMENTS. 193 

tal) goes where it is wanted most and commands the highest rate 
of interest. 

An increase in the bank rate has an immediate effect on 
foreign exchange transactions, making it unprofitable, or tending 
to make it unprofitable, to withdraw gold for export, and at the 
some time tending to make it profitable to ship gold from other 
financial centers to London. The bankers there pay a higher 
rate of interest and charge borrowers a higher rate of discount. 
The effect of the operation of raising the rate of discount even 
slightly is to swell the reserve in the vaults of the Bank of 
England, and at the same time to diminish loans by discouraging 
borrowers. With money a little ^^tighter," imports are dimin- 
ished and exports are increased, thus tending to change the bal- 
ance of trade in England^s favor and reduce the necessity for 
large foreign payments. The raising and lowering of the rate 
of discount by the directors of the Bank of England, then, acts 
as a lever of control to the financial and commercial systems of 
England. When the bank is ^^^flooded'^ with money, and no 
prospects are visible of a drain upon the reserve, the rate of dis- 
count is lowered. Money now flows from Lombard Street into 
other channels both in England and on the Continent, where it 
can be more profitably employed; with a lower rate of discount, 
borrowers are more plentiful, and more goods are imported. 

Many persons believe that the Bank of England has some 
peculiar power which enables it arbitrarily to fix the rate of in- 
terest, whereas the truth is the bank merely gives expression to 
the market value of money, as fixed by the laws of supply and 
demand. The value of money is settled, like that of all other 
Effect of commodities, by the inexorable law of demand and 

Supply and supply, and the bank merely takes the lead in fix- 

ing or establishing that value in the form of a 
discount rate. If the bank vaults are full, the bank lowers the 
rate to attract borrowers, the same as a merchant lowers the 
price of his goods in order to effect sales and reduce his stock. 



194 HISTORY OF BANKING. 

and the contrary policy is pursued to increase the cash in the 
bank vaults. 

The government of the Bank of England is confided in a 
board of twenty-four directors, a governor and a deputy gov- 
ernor, who each serve one year. In theory a portion of the di- 
rectors go out annually, remain out for a year and are then 
subject to re-election, but as a matter of fact they are nearly 
always re-elected at the end of the year, unless other members 
of the board oppose. All the directors in turn serve as deputy 
governor and governor, in rotation, and it is not until a director 
Management ^^^ heen upon the board perhaps twenty years 
of the Bank that he succccds to the position of governor. 

Engand When a vacancy occurs in the board by death or 

resignation, the directors usually select some promising young 
business man for the place. In order to reach the governorship 
within the period of a lifetime, it is necessary that new directors 
should be young men. The position of director of the Bank of 
England is considered a highly desirable one, as it gives a con- 
siderable status to both the individual and the house to which he 
belongs. By a long-established usage the directors cannot be 
connected with any other bank, in any official capacity. They 
must be merchants, brokers or capitalists of experience, and 
men presumed to possess information as to the present and future 
course of trade. The reason for the discrimination against bank- 
ers as members of the directory of the Bank of England no doubt 
arose out of the narrow-minded jealousy of former times, which 
regarded all other banks as rivals to be feared and opposed. 

In theory the system of management of the Bank of England 
would seem to be very objectionable. A governor, the chief 
executive officer of the bank, allowed to hold the office but one 
year, a directory made up of merchants, a portion of them young 
men, and not a trained banker in the entire board,* would not or- 



♦There Is no better school for the education of bankers in the larger lines 
of their profession, in a firm j?rip on guiding principles and a wide outlook 
over the whole commercial and linancial world, than service on the board 



MANAGEMENT. 195 

dinarily be regarded as a very competent or safe board. Indeed^ 
were such a system of management proposed at the present time 
for the conduct of a new and important banking house in En- 
gland or elsewhere, it would instantly be rejected as crude if 
not absurd. And yet the Bank of England, which holds the 
nation^s reserve, is managed in this way. Banking is now re- 
garded as a profession to which men should be trained by years 
of constant experience and familiarity with financial questions. 
And yet the Bank of England has been singularly well managed. 
Its directors have always seemed to appreciate the large re- 
sponsibility resting upon them, as managers of the bank which 
sustains the credit system of England, and while at times they 
have erred in policy the great institution stands to-day as solid, 
in the estimation and confidence of the people, as the government 
itself. 



of the Bank of England. As nearly all of the board have been many years 
in office, they are as a lot, men of ripe experience, and as the new men 
are always in the minority and are constantly being educated by their en- 
vironment and responsibilities, a tremendous force is thus developed in the 
line of conservative action. Technically they may not be bankers; prac- 
tically they are very good ones. 



CHAPTEE XX. 

GERMAN BANKING. 

REICHSBANK; ELASTICITY OP GERMAN CURRENCY; STABILITY; 
RUSSIAN BANKING. 

Prior to the unification of the German Empire in 1871 each 
state had its own banking system^ and most of the banks were 
allowed to issue notes according to certain restrictions and upon 
such bases as the states and cities establishing them should 
prescribe. These banks diilered materially as to the limit of 
their authorized issues^ and were bound to a great variety of 
restrictions as to their requirements of a reserve. Under this 
German Bank- ^^^^^ ^^ affairs uotcs wcrc currcut only in the 
ing before the state whcrc they were issued^ and trade was 
^^^^^ seriously hampered for want of a stable and uni- 

form currency. The coinage law of 1871 undertook to establish a 
uniform monetary system throughout the empire^ and paved the 
way for the adoption of the gold standard in 1873. In 1874 a 
law was passed abolishing the different issues of paper money 
then current throughout the different states of the empire and 
substituting therefor imperial bank notes convertible into gold. 
The new currency was distributed to the states to the extent 
of 180,000,000 marks. Finally, in 1875, all banks of issue 
throughout the empire were brought under a uniform law, and 
made a part of the system of imperial finance, thereby greatly 
improving and facilitating trade and commerce. 

Under this system the Bank of Prussia became the Imperial 
Bank of the empire, with a near approach to a monopoly of the 
note issuing power and the same system for the gradual abolition 
of the issues of other banks and the final concentration of the 
power of issuing circulating notes in the Imperial Bank as is 

196 



THE REICHSBAXK. 197 

possessed by the Bank of England. The capital of the Imperial 
Bank (Eeiehsbank) is 120,000,000 marks, divided into shares of 

3,000 marks each, and is all owned by private in- 
Reichsbank dividuals. Unlike the Bank of England, the 

Eeiehsbank is subject to governmental control. Its 
affairs are managed by a president and board of directors named 
by the government, subject to the chancellor of the empire, or a 
substitute named by him who has entire charge of the bank, and 
directs its policy. The stockholders of the bank have no voice 
whatever in its management. They merely furnish the capital 
and divide the profits of the institution. As a matter of fact, 
however, the stockholders do not receive all of the profits. In 
case the net profits exceed 3J per cent., then the government 
becomes a sharer in the profits above that limit. 

The German system of note issues rests upon a mixed basis 
of securities and specie, somewhat similar to that of England, 
with the important difference that the law contents itself with 
requiring the maintenance of this basis, without specially pledg- 
ing or setting apart specific coin or securities for the purpose, 
as is done by the Issue Department of the Bank of England. 
German currency is secured by the salutary power of the law 

rather than by specific property, and to make sure 
Loans*^ °^ of the obscrvancc of the law, all banks of issue 

are required to report the condition of their note 
issues every week to the chancellor of the empire, l^o precise 
limit is fixed for the aggregate circulation of the notes of the 
Eeiehsbank and other banks of issue, but the total of notes which 
can be issued without being covered by cash in the vaults of the 
banks is 385,000,000 marks, of which 250,000,000 marks are 
allowed to the Eeiehsbank and 135,000,000 marks are appor- 
tioned among the other banks. For all notes issued by any 
bank beyond its limit, the government requires that cash shall 
be held to the full amount of such issue, the term ^^casV^ here 
meaning German and foreign gold, bullion, imperial treasury 



198 HISTORY OF BANKING. 

notes and the notes of other banks. But if any bank issues 
notes beyond the limit and not covered by cash a government 
tax of 5 per cent, is imposed, thus taking away the profit, and 
hence the inducement to such extra issue. In case the weekly 
report of any bank shows that its issue exceeds the limit as above 
explained, a tax of 5/48 per cent, is charged, this being the rate 
for one week at 5 per cent, per annum. The law requires in 
any case, however, that the cash held, exclusive of the notes of 
other banks, must equal not less than one-third of the total 
note circulation, and that the remainder shall be protected by 
good assets, usually consisting of securities or discounted paper 
having not more than three months to run and bearing two 
solvent names. The note issues of Germany thus rest upon a 
mixed basis of specie and other assets. 

As previously stated, the legal limit of note issue without 
specie reserve may be exceeded upon payment of the government 
tax of 5 per cent.. This is an important feature of the German 
system, since it gives an elasticity to the currency of the empire. 
In a time of stringency, the rate of discount goes 
the Currency above 5 per Cent., and then the banks can make an 
issue beyond the limit, loan the funds at the ruling 
rate of discount and have a profit left after paying the govern- 
ment tax of 5 per cent. But the moment the money market 
loosens and the rate of discount falls below 5 per cent, the 
banks can no longer afford to loan out funds at a rate which 
is lower than the tax which they must pay to the government, 
and hence the extra circulation is retired. By this system the 
volume of the circulating medium adjusts itself to the needs of 
the country. This automatic contraction and expansion has been 
of great benefit to the commercial interests of Germany. In this 
way financial stringencies have several times been relieved and 
probable panics averted. 

The currency of Germany is kept on a gold basis by the 
Imperial Bank, which is required to redeem its notes on demand. 



BANKING RESERVES. 199 

While the notes are not issued against a specific reserve^ as in 
the case of the Bank of England, but against the general assets of 
the bank, and are not even a prior lien on those assets, never- 
theless a sufficient supply of gold is carried in the vaults of all 
the issuing banks to place the redemption of the notes beyond 

doubt in the minds of the people. In 1899 the 
Gold Basis total volumc of circulating notes outstanding in 

Germany amounted to 1,323,208,000 marks, and 
the total metallic reserve held by the eight banks issuing these 
notes was 911,528,000 or a little less than seventy per cent. 

Bank notes in Germany are not issued in lower denomina- 
tions than 100 marks, and this restriction keeps in constant 
circulation a considerable quantity of specie for small trans- 
actions. The bank notes are not a legal tender, but their credit 
is maintained by their convertibility at all banks of issue. By 
means of an extensive system of branches of the Eeichsbank scat- 
tered throughout the empire, the system of deposit banking is 
becoming quite popular, thus reducing to a certain extent the 
use of bank notes in the transaction of business. A large number 
of joint stock banks located in Berlin and other prominent 
cities of the empire have been organized, and materially assisted 
in furnishing banking facilities to the people and educating the 
masses in the utility of deposit banking. These joint stock 
banks, as a rule, carry their reserves in the Eeichsbank, that 

institution being the safest and most convenient 
Res^r^Jes storchousc of gold in the empire. Thus it will be 

seen that these banks sustain very much the same 
relation to the Eeichsbank that the joint stock banks of London 
do to the Bank of England. The policy of the management of 
the Eeichsbank has been to guard well these reserves by a large 
supply of gold in the vaults, so as to protect the credit system of 
the empire by establishing perfect confidence. Like the Bank 
of England, the Eeichsbank resorts to the scheme of raising 
or lowering its rate of discount to protect its reserve, raising 



200 HISTORY OF BANKING. 

its rate in times of danger and lowering it in times of peace 
and plenty. 

In order that the action of the Eeichsbank may virtually 
control the money market^ the law forbids all other banks of 
issue to discount at a rate lower than that of the Eeichsbank 
when its rate is as high as four per cent. Thus when the 
Eeichsbank raises its rate to or above four per cent, all of the 

banks of issue are compelled by law to do the 
Banks^^ ^^^^"^ same. When the Eeichsbank lowers its rate below 

four per cent, the other banks are allowed to 
discount at a rate of one-fourth of one per cent, lower than the 
Eeichsbank rate. Were it not compulsory on other banks to 
follow the rate announced by the Eeichsbank^ business would 
merely shift from one bank to another and the general situation 
would in no way be affected or improved. The Eeichsbank has 
about three hundred branches scattered throughout the empire 
and with the influence of these in addition to the banks of 
issue the rate of discount as established in Berlin by the 
Eeichsbank is easily maintained and made to control the price 
of money throughout the empire. 

In addition to the specie and bank notes in circulation in 
Germany the government has notes of its own in circulation. An 
imperial "war chesf^ is kept in which is stored a large reserve 
Imperial ^^ S^ld as an emergency fund to be used in time 

Treasury of war. IThis fuud is estimated at 150,000,000 

marks, and in order to prevent so large an amount 
of cash from lying idle, an issue of imperial treasury notes for 
an equal amount is put into circulation. These notes are really 
gold certificates, since they merely circulate instead of the coin. 

EUSSIAN BANKING. 

The Imperial Bank of Eussia was established in 1860 with 
a capital of 25,000,000 roubles. It is wholly a government in- 
stitution, controlled by the Czar, and has no connection what- 



CIRCULATION AND REDEMPTION. 201 

ever with private individuals, except to the extent of its daily 
business transactions. It thus partakes of the imperialistic 
character of the government in a decided degree. As has been 
expressed by one economic writer, it "is as if we 
of*Ru"sia^^°^ ^^^ ^ bureau in the Treasury Department with 
power to do a great and varied banking business 
and with branches all over the country.^^ Unlike the Bank of 
England, the Bank of France, or the Eeichsbank of Germany, 
which are formed by means of private capital, the Imperial 
Bank of Russia is merely the Eussian Government engaged in the 
banking business with its own capital and for its exclusive 
profit. In 1896 the capital of the bank was increased to 50,- 
000,000 roubles. It issues the paper money of the empire ex- 
clusively. The issue and the commercial banking departments 
are kept entirely separate, upon practically the same plan as 
that followed by the Bank of England. 

Paper money is the actual medium of exchange in Eussia. 
Notes are issued in denominations of 100, 25, 5, 3 and 1 roubles 
and are full legal tender. Specie payments have been suspended 
since 1855. The paper rouble is worth 66f copecks, there being 
100 copecks in a rouble. The authorized circulation of paper 
currency based upon the credit of the govern- 
circuiation mcut is 769,342,911 roubles. This is fiat money. 

Above this the note issues, if any, must be covered 
by the deposit of an equal amount of coin. The total circulation, 
both covered and uncovered, is about 1,100,000,000 roubles, 
and the metallic cash in the bank vaults is in the neighborhood 
of 700,000,000 roubles, of which less than twenty millions are 
in silver. 

Although the bank holds what is called a redemption fund, 
there is no provision made for the redemption of the notes. The 
stock of gold which is held is merely for the purpose of estab- 
lishing confidence in the minds of the people, preventing fluctua- 
tions or depreciation of the paper currency and holding the 



202 HISTORY OF BANKING. 

value of the paper at a fixed rate in proportion to gold. Under 
this policy the rouble has been practically stationary in value 

during the past ten years, and its value has been 
Redemption fixcd by exchange at 66f copecks, or, one gold 

rouble as equivalent to one and one-half paper 
roubles. The paper currency is thus given a fixed value and 
the two roubles — paper and gold, circulate side by side at the 
agreed value of three to two. The government has accumulated 
its gold reserve by retaining most of the gold product of the 
Eussian mines in recent years. 

The commercial banking department of the Imperial Bank 
of Eussia exercises all of the ordinary functions of a bank of 
deposit. By means of its one hundred branches scattered 
throughout the empire, the Imperial Bank has been able to 
reach the people and supply needed banking facilities in a fairly 
satisfactory measure. The policy of the present Czar is to de- 
Commerciai ^^clop the almost limitlcss resources of the country. 
Banking and to this end the government, through its bank, 

epartment ^^ ^^^^ liberal in making loans, frequently taking 
risks which would not be regarded as safe according to the usual 
rules of credit. The government no doubt is willing to take 
some risks for the sake of the general betterment of the country, 
and it can afford to make unusual loans since it has extraordinary 
power to punish delinquent debtors. 

Loans for development purposes are regarded with especial 
favor by the loan department of the bank, since new industries 
in all parts of Eussia are much desired by the Czar. Agricultural 

loans are a prominent feature of Eussian banking. 
Loans These consist of loans made to small farmers upon 

a pledge of their products, or the guarantee of 
individuals who may be regarded by the bank as trustworthy. 
Loans are also made to mechanics and manufacturers upon 
pledges of their products. In both this and the agricultural 
class of loans the property pledged remains in the possession of 



LOANS. 203 

the producers^ and the loans are made for long terms — until the 
products can be marketed. This system results in some losses 
to the government^ but the general benefit to the country by 
stimulating industry is believed by Eussian statesmen to more 
than compensate for the percentage of losses. 

It will be seen from the foregoing description that the Eussian 
banking system is not a complicated one^, since no private capital 
or individual management is involved. Its volume of circulating 
medium is dependent upon the will of the government, and is 
limited only by the amount which will circulate without serious 
depreciation. As previously stated the paper currency is worth 
but 66| per cent, of gold, but the government aims to hold it 
at this point. This can only be done by strengthening the gold 
reserve, and the financial policy of the government is to do 
this. In case of hard times the government increases the volume 
of money sufficient to slightly raise prices and stimulate produc- 
tion. This is the elasticity of the Eussian system of currency. 



CHAPTER XXI. 

SCOTCH AND CANADIAN BANKING. 

SCOTCH SYSTEM; BRANCH BANKS; CANADIAN SYSTEM; 
ASSET BANKING; ELASTICITY. 

Banking in Scotland is conducted upon a system resembling 
in many respects the English^, and yet differing from it in 
several important particulars. There are ten banks of issue, each 
of which has many of the privileges of the Bank of England, 
but without the monopoly which the latter possesses in England 
and Wales. These ten banks are strictly private institutions, 
but are allowed to issue notes after the method of the Bank of 
Organization England. The act of 1845 regulating the banking 
of the Banks systcm of Scotland, fixed the volume of authorized 
of Scotland ^^^^ j^^^^^ ^^ ^j^ ^^^ ^^^-^^ ^^ £3,087,209, which, 

however, has since been reduced by the suspension of two banks 
to £2,676,350. All note issues above this amount must be fully 
covered by coin, one-fifth of which may be silver. The circula- 
tion on June 30, 1900, amounted to £7,903,000, and in addition 
to this, Bank of England notes circulate extensively in Scotland. 
A large portion of the circulating bank notes of Scotland are in 
denominations of less than £5, while the Bank of England notes 
are all of £5 or upwards. 

May and November in Scotland are the seasons for making 
the regular semi-annual settlements. Interest on mortgages is 
then collected, and annuities are received. The country folk 
draw the interest on their bank deposits, and there 
Elasticity is a general liquidation throughout the country re- 

quiring an additional volume of currency. The 
banks are then pressed to enlarge their circulation, and in order 
to do this they must in some cases bring specie from the 
Bank of England, the great storehouse of cash for the United 

204 



SCOTCH SYSTEM. 205 

Kingdom. After the drain is over the circulation falls to its 
normal volume and the boxes of gold are returned to London^, 
without^ in many instances^ having been opened. The elasticity 
of the currency would be much greater were it not limited by 
the requirement of the coin deposit^ but safety in Scotland, as in 
England, is preferred to elasticity, and the quality of safety is 
so great that the people prefer bank notes to gold. 

A novel feature of the Scotch system is the cash credit 
accounts, by which a customer whose account is secured by the 
guarantee of two friends, is supplied with funds from time to 
time as he needs it to the agreed limit. The system practically 
amounts to the granting of permission to firms or individuals 

to overdraw their bank accounts to a certain ex- 
Accounts^^^ tent. The design is to furnish a working capital 

to tradesmen and farmers, especially those who 
are possessed of good character but with little means. The custom- 
er is only charged interest from day to day on the amount which 
he actually draws under his cash credit and his deposits go to re- 
duce the amount of such interest. The difference between this 
arrangement and the usual way of covering the loan with a note 
is that the daily deposits of the customer reduce the interest 
charge and the bank has control of all sums not in active use. 

Scotland has eleven banks and these have 1,077 branches. 
IvTowhere else is the system of branch banking so extensively 
carried on, a feature scarcely known in the United States. 
Scotland has one bank or branch bank to every 4,000 of popula- 
tion against one to about every 10,000 in England, and one 
national bank to nearly every 20,000 people in the United 

States. With a population of only a little over 
Branch Banks 4,000,000 Scotland has bank deposits of £103,674,- 

000, or nearly £26 per capita. This speaks well 
for the thrift of the people and may be attributed in a large part 
to the diffusion of branch banks into every corner of the public 
domain. In the early history of banking in Scotland a low 



206 HISTORY OF BANKING. 

rate of interest was paid by the banks on current deposit ac- 
counts. This no doubt stimulated habits of saving and thrift 
among the people and taught them to use the banks as de- 
positories for their funds. Gradually the interest was reduced 
and finally abolished on all but savings accounts^ with little or 
no diminution of the number and size of the depositors' accounts. 
Governed by a head bank, the expense of conducting the branches 
is comparatively small, amounting on an average to not more 
than 1^ per cent, on the deposits, and thus with the economy 
of resources afforded by the system, the eleven institutions 
produce earnings which enable them to pay dividends of 8 to 15 
per cent, per annum. 

THE CANADIAN SYSTEM. 

Prior to the consolidation of the various provinces into the 
Dominion of Canada, in 1867, a number of the largest banks 
issued circulating notes under permission of their respective 
provincial governments, but after the consolidation, only banks 
authorized by the general government were permitted to issue 
notes. The present banking system of Canada somewhat resem- 
bles that of Scotland, and possesses some excellent features, 
among which is its system of "^^asset currency^' with its very 
desirable quality of perfect elasticity. In 1870 a law was passed 
requiring all banks of issue in the dominion to have a paid up 
capital of at least $250,000, and restricting the note issue of 
each bank to the amount of its paid up capital. In 1891 the 
banking act was amended and the capital stock limit of issuing 
banks was raised to $500,000, of which one-half must be paid 
over at the time of organizing the bank, to the minister of 
finance, to be held by him until the organization is complete and 
all details of the law have been complied with. He then pays 
back to the bank the amount so deposited, less five per cent, of 
the capital, which is retained as a guaranty fund, to be used 
in the redemption of notes in case of the failure of the bank. 



CANADIAN SYSTEM. 207 

A Canadian bank may issue notes to the full amount of its 
capital stock, and no reserve is required to be kept on hand as a 
security for their redemption, the only provision 
No Reserve of this kind being the fund in the hands of the 

treasurer, composed of the five per cent, required 
to be deposited by each bank of issue at its forma- 
tion. Thus the notes of every bank are credit obliga- 
tions based upon almost wholly the general assets of the bank, 
but the law makes them a first lien upon such assets, liabilities to 
the dominion government being a second lien, and liabilities to 
the provincial government a third lien. In addition to this 
very excellent precaution, the law imposes a double liability upon 
the stockholder, making each liable for double the amount of 
stock which he holds.* 

N"o inspectors or examiners are employed by the government, 
but monthly reports are made to the government showing the 
condition of the bank's assets, circulation, etc., and severe pen- 
alties — ^fine and imprisonment — are prescribed for failure to 
comply with the law or the making of false returns. 
Inspection The bauks may also demand of each other state- 

ments as to their condition at any time, and thus 
the most careful scrutiny is exercised by each bank upon all of 
the others as well as by the government. Since each bank in the 
regular course of business has occasion to take over its counter 
the notes of other banks, the care exercised against taking notes 
that are not good is a wholesome restraint upon every bank, 
and under the system every banker is watching the solvency of 
every other. This supervision is far more thorough and effective 
than that of government inspection, since bankers are not only 
more capable of scrutinizing such institutions, but it is vital 
to their interest to do this in the most thorough manner. 



♦Two banks, La Bank du Peuple and the Bank of British North America, 
exist under ancient charters which do not permit of the double liability- 
requirement as to stockholder, and for this reason they are only allowed to 
issue notes to the amount of 75 per cent, of their capital. 



208 HISTORY OF BANKING. 

An essential feature of the Canadian system is the fact that 
the bank notes are not a legal tender^ for were they possessed 
of this quality, other banks would be compelled to accept them, 
irrespective of the solvency of the issuing bank. They would 

circulate then not upon their merits but upon the 
Tcnder^^^ legal tender quality underlying them. Without 

the legal tender quality to float the circulating 
notes, each bank takes them upon the soundness of the bank 
issuing them, and upon the slightest indication of weakness on 
the part of the issuing bank its notes are thrown out and it is 
discredited. Thus any bank may be summarily and severely 
punished the moment it allows itself to get into an unsound or 
weak condition. 

The banks of the three financial centers of the dominion, 
viz., Montreal, Quebec and Toronto, act as clearing houses for 
all the banks of the dominion. Notes of any discredited bank are 
immediately sent to them for redemption, and should a bank 
suspend, liquidators are at once appointed to convert the assets 
and redeem the circulating notes. In case the assets are insuffi- 
cient for this purpose the extra liability of the stockholders is 
resorted to, and should this not prove sufficient, then the five 
per cent, fund in the hands of the treasurer is forthcoming for 

the purpose. Should this fund become exhausted. 
Liquidation the solvcut banks are assessed to make up the 

difference. As a matter of fact, however, the 
liquidators are always able to redeem the notes out of the assets, 
but in order that all solvent banks may accept the notes of an 
insolvent bank without loss, the law provides that such notes shall 
bear interest at the rate of six per cent, from the date of the sus- 
pension of the bank until they are redeemed. Thus the notes 
of even a suspended bank never fall below par. After the lapse 
of sixty days, if the liquidators do not pay, then the treasurer 
pays them out of the redemption fund. 

The banks are compelled to keep their notes at par, and in 



CANADIAN SYSTEM. 209 

order to do this they must provide redemption agents at various 

points throughout the dominion. Were it not for 
Notes at Par this provision^ notes of a Montreal bank would be 

at a discount when circulating in a distant prov- 
ince like Manitoba^ for the reason that time and effort would 
be required to present the note at the proper place for redemption. 
The elasticity of the circulating medium is one of the features 
most prized in the Canadian banking system. This quality 
of being capable of expansion and contraction according to the 
requirements of trade is possessed by the note circulation of 
Canada to a greater extent than that of any other in the world. 
When business activity demands a large circulating medium 
the banks issue their notes to meet the demand, not exceeding, 
of course, the amount of their paid up capital, and when less 

money is needed these notes drift back into the 
the Currency tanks in the form of deposits or in liquidation of 

discounts and are thus practically retired, being 
locked up in the vaults. They are not then idle capital since they 
have cost nothing, except the expense of printing them. The 
volume of the circulating medium of Canada often varies as 
much as 15 per cent, in the course of the year. As a matter of 
fact the volume of notes outstanding is usually not much above 
75 per cent, of the paid up capital of the banks, thus the cur- 
rency has an expansibility in case of emergency amounting to 
nearly one-fourth its usual volume, provided, of course, the 
assets of the bank are sound in quality. As a result of this, 
rates of interest in Canada are comparatively uniform, and a 
"tight'^ money market is unknown.* 

With the currency based upon the general assets of the 
bank having a priority of lien over all other liabilities, being 



♦True elasticity in bank note circulation implies automatic adjustment of 
the volume to the needs of business. Heretofore the Canadian system 
has worked perfectly because the banks have been able at all times to 
supply all that has been needed without exceeding the maximum limit, 
and that limit was so well beyond the need of the country that the banks 



310 HISTORY OF BANKING. 

under the surveillance of not only the government but, better 
still, the entire banking fraternity, and safeguarded by the 
double liability of stockholders, it is believed that the note 
circulation of Canada is absolutely safe, and possesses advantages 
over any other system. 

The system of branch banks which prevails in Canada is not 
only an advantage to the banks, but a decided convenience to 
the people. Nearly every bank of any considerable size in the 
dominion has a number of branches scattered throughout the 
provinces, there being in all about 650 branches. Weekly re- 
ports are made to the head bank, and thus the manager is kept 
fully posted as to the business transacted by the branches. By 
this system sparsely settled portions of the dominion are pro- 
vided with banking facilities through a branch 
Branch Banks bank, whcre the business in that particular sec- 
tion would not be sufficient to support an inde- 
pendent bank. The branch may be conducted in a small and 
inexpensive manner suited to the needs of the community, while 
it furnishes the benefits of the financial strength and solidity 
of the parent institution. Then again, through its various 
branches a bank is able to loan out its funds advantageously 
where money is most needed. In one province there may be an 
abundance of money seeking investment, with large deposits in 
the banks, while in another where the work of development of 
natural resources is going on, there may be a demand for 
money, and small deposits in the banks. Now by transferring the 
surplus funds from the one province to the other both are 
accommodated, and this can be done easily and readily through 
the agency of the branch bank system. Not only is the public 
accommodated, but by this means the banks are able to earn 

have seldom been able to push their notes out so as to raise the total 
beyond 75 per cent, of the maximum. Of late, however, the rapid develop- 
ment of the country without proportionate increase in its banking capital 
has changed this and their issues now approximate very nearly to the 
lawful maximum at all seasons. 



CANADIAN SYSTEM. 211 

larger dividends;, in consequence of using their assets to the 
best advantage. Under this system the farmer in the Northwest 
is able to borrow money almost as cheaply as a resident of 
Quebec. 

Mr. B. E. Walker^ President of the Canadian Bankers^ Asso- 
ciation, in explaining the advantages of the branch system^ 
said: ^^In Canada, with its banks with forty and fifty branches, 
we see the deposits of the saving communities applied directly to 
the country's new enterprises in a manner nearly perfect. The 
Bank of Montreal borrows money from depositors at Halifax 
and many points in the maritime provinces where savings largely 
exceed the new enterprises, and it lends money in Vancouver or 
in the Northwest, where the new enterprises far exceed the 
people's earnings.'' As water ^^seeks its level" so money will 
to a certain extent flow where the greatest demand for it exists 
and the highest rates of interest are paid, but by means of the 
system of branch banks this ebbing and flowing of the financial 
tide is greatly facilitated. 

A third advantage growing out of this mobility of the finan- 
cial system is that a financial stringency in any part of the 
Dominion can be instantly relieved by transferring funds from 
any other part, thus averting what might, under other circum- 
stances, become a panic or commercial crisis. 

In the United States under our law there can be no branch 
banks in our national banking system because every national 
bank must have a capital of at least $25,000, and when a strin- 
gency arises in any part of the country, the banks both there 
and elsewhere usually look out for their own welfare, and money 
does not flow to the point where it is needed, as under the 
branch bank system. 

While the law does not specifically require the banks to 
carry a reserve, in order to protect their notes, nearly all of the 
Canadian banks maintain a reserve as a means of demonstrating 
their strength and as a practical necessity in the conduct of their 
business. 



212 lllSTOKY OF BANKING. 

The Canadian government issues a paper currency called 
^^Dominion Notes^^ which is a legal tender and redeemable in 
gold on demand. These notes are issued in denominations of 
25c, $1, $2, $4, $50, $100, $500 and $1,000, and together with 
a small proportion of silver, furnish the circulating medium 

for small transactions, the bank notes not being 
Not^s"^°" issued in denominations below $5, and above that 

amount only in multiples of five. In making pay- 
ments every bank is compelled, if required, to pay small Domin- 
ion notes to an amount not exceeding $100. Thus the notes 
readily circulate, keeping the bank note circulating at par with 
it, and the whole upon a gold basis. There is no limit upon the 
issue of notes by the government, but for all over $20,000,000 an 
equal amount of gold must be held by the minister of finance. 
Below that amount the government reserve consists of gold 
and Dominion bonds. 



CHAPTER XXII. 

BANKING IN THE UNITED STATES. 

COLONIAL PERIOD; BANK OF NORTH AMERICA; HAMILTON'S 
VIEWS; FIRST UNITED STATES BANK; STATE BANKS. 

Prior to the achievement of their independence the banking 
facilities of the colonies were not only very limited, but crude 
and unsettled. No well defined system of finance or banking had 
been worked out, even in the older countries of Europe. The 
Bank of England came the nearest to a settled plan, but it was in 
the experimental stage, constantly changing its policy or methods 
during the first hundred years of its existence. Men did not 
understand finance. They were groping about, experimenting, 
trying all manner of schemes and hoping to find the successful 
one. The first banking experiment in this country of which 
we have any reliable account was started in Boston in 1714, 
and was to be a land bank, patterned no doubt on ideas borrowed 
from John Law of France. This scheme was entitled '^K Pro- 
jection for Erecting a Bank of Credit in Boston, New England, 
Founded on Land Security.'' The capital was fixed at £300,000, 
and each subscriber to the stock was required to *^^settle and make 
over real estate to the value of his respective subscription to 
the trustees of the partnership or bank, to remain as a fund 
or security for such bills as shall be emitted therefrom.'' At 
meetings of the stockholders, each person should 
Banking ^^^ '^^^^ morc than five votes, irrespective of the 

number of shares which he held. Loans were to 
be made on ^^ratable estates" to the amount of two-thirds their 
value; on wooden houses, not exceeding the value of the land 
included with the house; on brick houses, to the extent of one 
and a half times the value of the land belonging to them; ^^on 

218 



214 HISTORY OP BANKING. 

iron or other imperishable commodities as a pledge, for a half or 
two-thirds, according to the market/^ The scheme was very 
popular, especially with the irresponsible class and those pos- 
sessed of real estate but no ready cash, who wanted to borrow 
money on easy terms. The project was vigorously attacked in 
a pamphlet by Paul Dudley, attorney general, who showed that 
the pretended land security for the bills was in reality no 
security at all, since the holder of them could do nothing with 
a mortgage if it were turned over to him. He gave it as his 
legal opinion that the mortgages were without consideration 
and would not be enforced by the courts. When a charter was 
applied for, the scheme was vetoed by the Colonial Legislature. 
Next came the Land Bank of 1741, a ^^pernicious grand bubble,^^ 
a scheme which convulsed society in its day and came near pro- 
ducing a revolution. This bank began to issue circulating notes 
without a charter. The governor issued a proclamation against 
it and a general quarrel ensued. New banks now began to be 
organized, in imitation of this one, in all towns of importance 
and a regular banking mania broke out. The financial schemes 
were projected by ^^a vast multitude of necessitous, idle and 
extravagant persons, (who) contrived to obtain what they call 
money, at an easy rate and to pay their debts in a precarious, 
fallacious kind of bills, very illy or not at all secured, of no de- 
termined value, bearing no interest,^^ and payable at some in- 
definite time. The situation resembled somewhat that which 
had existed in England during the South Sea speculative mania, 
and to bring the colonists to their senses and put a stop to these 
wild schemes. Parliament extended the prohibitions and penal- 
ties of the Anti-Bubble Act to the colonies. This stirred up 
much antagonism and resentment in the minds of the people, 
but resulted in killing the Land Bank. The liquidation of the 
bank's afi'airs extended over a period of almost a quarter of a 
century, and nearly every one who had any connection with the 
institution was ruined. 



COLONIAL BANKING. 215 

During the Eevolutionary War, one of the most difficult 
and embarrassing problems which confronted the Continental 
Congress was the money question. How to provide the means 
for keeping the armies in the field was a knotty question. The 
treasury was bankrupt, and Congress possessed no power to com- 
pel the several states comprising the confederacy to pay their 
just portion of the taxes. Congress undertook to tide over the 
emergency by issuing bills of credit,* which were to pass as 
currency, but as millions upon millions of these were printed, 
and as the prospects of a successful termination of the war be- 
came doubtful, these bills sank in value until in 1778 a dollar 
During the ^^^ worth but Sixteen cents in gold. In 1780 it 

Revolutionary had fallen to two ccuts, and in 1782 it required 
$1,000 in notes to equal $1 in gold. Different 
states issued paper money at the same time which circulated at 
various values. The people were poor, in debt, and discon- 
tented, and general grumbling prevailed. In order to remedy this 
state of affairs and bring some degree of financial order out of 
the general confusion, Eobert Morris, then superintendent of 
finance, in 1782 obtained a charter from the Continental Con- 
gress for the Bank of North America, at Philadelphia. The 
continental money was then almost worthless, having caused, as 
Mr. Morris said, ^^Infinite private mischief, numberless frauds, 
and the greatest distress,^' and he rightly believed that a large 
bank, properly conducted, and under control of the government 
would be of great service to both the government and the people. 
The capital of the bank was $400,000, and its affairs were con- 
ducted by a board of twelve directors, under the inspection of 
the superintendent of finance, who was to receive daily reports 
of the business of the bank. By the fortunate arrival of $470,- 
000 in specie from France about this time, which was deposited 
in the bank, thereby greatly strengthening its standing and 

♦Bills of credit were issues of pure fiat money, based upon no assets and 
having only the faith of the people in the issuing government to support 
them. 



21G HISTORY OF BANKING. 

credit^ the bank was enabled to make large loans to the govern- 
ment for the purchase of army supplies. Mr. Morris afterwards 
said, "Without the establishment of a national bank, the business 
of the department of finance could not have been performed/' 
and the war could not have been successfully prosecuted. 

As some doubt existed as to the validity of a charter from 
Congress, the bank applied to and received one from the state 
of Pennsylvania. After the close of the war the bank did a pros- 
perous business, earning dividends as high as 14 per cent. These 
tempting gains prompted the starting of another bank, but the 
Bank of North America prevented competition by absorbing the 
new institution, thereby increasing its capital stock to $830,000. 
Some dissatisfaction arose among the "^^debtor class'' of the bank's 
customers on account of the bank's practice of requiring its 
paper to be promptly met at maturity, and the legislature was 

petitioned to annul its charter, urging "usury, ex- 
RepeafeT^ tortiou, favoritism, harshness to debtors and the 

possession of undue political and commercial in- 
fluence." Strange as it may seem, the petition was granted and 
the charter annulled in 1785. The bank continued to do busi- 
ness under its governmental authority, and in 1787 the legis- 
lature of Pennsylvania repented of its former ill considered 
action and renewed the charter. When Alexander Hamilton 
took charge of the government finances in 1790 he was opposed 
to continuing the Bank of North America as a government 
agent, claiming that its state charter virtually annulled its 
national one, and made the bank a state institution. Washing- 
ton and Congress seemed to accept this view, and abandoned all 
government connection with the bank. It continued to do 
business as a state bank until the organization of our national 
banking system, when it entered the list as a national bank. By 
a special dispensation, in view of its illustrious origin, it was 
permitted to qualify under the national banking law, without 
changing its name, and so continues to the present time a vener- 



BANK OP NORTH AMERICA. 217 

able and useful institution^ the oldest bank in the United States. 
Between 1782 and 1790, the Bank of North America had 
been the depository of the government funds, had collected and 
disbursed the revenues, and performed most of the functions 
which are now performed by the government treasury, but in his 
report of December 13, 1790, Hamilton strongly recommended 
the organization of a United States Bank large enough and 
strong enough to furnish a uniform and stable currency as well 
as to properly perform the duties of financial agent. In this he 
took the ground that the government should not issue paper 

money directly, but that a great bank, strong 
ReportTi7go euough for the purpose, should make such issue 

subject to governmental restrictions. Hamilton 
understood the functions of a bank and saw how it served as 
a manufactory of credit. He said: 

"Every loan which a bank makes is, in its first shape a 
credit given to the borrower on its books, the amount of which 
it stands ready to pay, either in its own notes, or gold or silver 
at his option. But, in a great number of cases, no actual payment 
is made in either. The borrower, frequently, by check or order, 
transfers his credit to some other person, to whom he has a 
payment to make, who in his turn is as often content with a simi- 
lar credit because he is satisfied that he can, whenever he pleases, 
either convert it into cash or pass it to some other hand, as an 
equivalent for it, and in this manner the credit keeps circulating, 
performing in every stage the office of money, till it is extin- 
guished by a discount with som.e person who has a payment to 
make to the bank, to an equal or greater amount. Thus large 
sums are lent and paid, frequently through a variety of hands, 
without the intervention of a single piece of coin.^' 

A bill was introduced, in accordance with Hamilton's sug- 
gestions, for the creation of the first United States Bank, to be 
located in the city of Philadelphia. This bill met with strenu- 
ous opposition from the "strict constructionists.^' Madison 



218 HISTORY OF BANKING. 

was the leader of the opposition in the House^ his main objection 
to the measure being ^^That the power of establishing an incor- 
porated bank was not among the powers vested in Congress b}^ 
The First ^^^ Constitution/^ But in answer to this^ Hamil- 

united states tou expouudcd the doctrinc of implied powers, 
claiming that the power to create a bank was 
clearly implied from the express power given Congress by the 
constitution. The bill became a law on February 25, 1791. Its 
chief provisions were: 

1. The bank was to have a capital of $10,000,000, divided 
into 25,000 shares of $400 each. Eight millions of the capital 
stock were open to subscriptions by the people, one-fourth to be 
paid in specie and three-fourth in government bonds. The 
remaining two millions were to be subscribed by the government, 
payable in ten annual installments. 

2. Each stockholder could cast one vote for one share of 
stocky one for the next ten shares, etc., but no shareholder could 
cast more than thirty votes. Foreign stockholders could not 
vote by proxy, and thus were practically prohibited from voting, 
the object being to prevent the bank from being controlled by 
a few individuals or by foreigners. 

3. The bank was to be managed by twenty-five directors, all 
of whom must be citizens of the United States. 

4. The bank could lend money on real estate security 
but could not hold title to real estate except temporarily, until 
it could be properly disposed of. 

5. The bank could issue circulating notes to the amount 
of its capital stock. These notes were receivable for public dues 
as long as they were payable in gold and silver coin. 

6. The head of the treasury should have the right to inspect 
all accounts of the bank except depositors' accounts, and could 
call for reports weekly if he desired. 

7. The directors could establish branches as they chose 
for the purpose of deposit and discount. 



FIRST UNITED STATES BANK. 219 

8. The bank's charter was to run twenty years^ and the 
government pledged itself to grant no other charter for a like 
institution during that period. 

Branches were organized in New York^ Boston^ Baltimore, 
Norfolk, Charleston, Savannah, Washington and New Orleans, 
Branches, and the bank at once became a successful and pros- 

Fhfa^ndai perous institution. After the abandonment of the 

Success Bank of North America by the government as a 

place of deposit for public funds, the customs receipts of 1790 
and 1791 had been deposited in state banks. These were drawn 
against for current outlays, and the cash receipts were placed in 
the Bank of the United States, thus gradually the accounts of the 
government in the state banks were depleted and extinguished 
and the national funds passed into the hands of the Bank of 
the United States. The great bank thus became the custodian 
of the government funds. It sold bonds, transferred funds from 
place to place as needed, and disbursed public money on w^arrants 
as directed by the treasurer. It also made loans to the govern- 
ment, and by 1795 these amounted to nearly $6,000,000. The 
bank was a great financial success. By its policy of satisfactory 
dealings wdth the public and the government it maintained an 
excellent reputation. Its paper currency had the effect of giving 
stability and uniformity to the money of the country, and in 
many ways it contributed to the national prosperity and welfare, 
besides earning dividends at an average rate of 8f per cent, 
for its stockholders. 

The government was very slow with the payment of its 
installments to the capital stock of the bank and in 1796 the 
first, second, third, fourth and fifth installments were due and 
almost wholly unpaid. The government then began selling its 
stock to private individuals and by 1802 its entire interest had 
been disposed of. In 1809 Secretary Gallatin reported that 
the government had made a profit of $671,860 on the sale of its 
stock in the bank. A large portion of the stock had passed into 



220 HISTORY OF BANKING. 

the hands of foreigners, so that only 7,000 shares were owned 
by American citizens, while 18,000 were held abroad. The cir- 
culating notes outstanding at that time were $4,500,000; specie 

on hand, $5,000,000; loans and discounts, $15,- 
^hTl7lk ""^ 000,000. Thus the bank was in excellent condition, 

and the stockholders in 1810 applied for a renewal 
of its charter, enumerating in their petition to Congress the 
advantages which the bank had afforded the government, as a 
depository of the public funds; the transfer and disbursement 
of public money free of cost; loans to the government; a stable 
paper currency; profit from the sale of stock, etc. 

A contest of extreme bitterness ensued. Secretary Gallatin 
strongly recommended the renewal of the charter, with an in- 
crease of the capital of the bank to $30,000,000. Of this amount 
$15,000,000 should be subscribed by such states as desired it, 
and branches should be organized in all states thus subscribing. 
In anticipation of the prospective war with England, Mr. Gallatin 
inserted a clause in the proposed charter obligating the bank 
to lend three-fifths of its capital to the government whenever re- 
quired to do so. Just at this time the feeling against England 
ran high, and the fact that 18,000 shares of the bank were held 
abroad, mostly in England, aroused a strong feeling of resentment 
and opposition towards the bank. Mr. Gallatin reminded the 
Opposition to peoplc that foreigners had no voice in the con- 
Renewai of duct of the bank, and that in case the renewal of 

the Charter ^^^ charter was denied, it would be necessary to 

remit about $7,200,000 abroad at once in settlement for the 
stock held there, that being its market value, and that the country 
could illy afford to spare that amount of specie on the eve of war, 
when every dollar would be needed at home, whereas if the 
charter was renewed it would only be necessary to remit to 
England the annual dividend of about 8J per cent., equivalent 
in effect to having an English loan of $7,200,000 at 8^ per 
cent, to aid us in the war. But such arOTments onlv seemed 



FIRST UNITED STATES BANK. 221 

to inflame the opposition. Henry Clay^ then just coming into 
popularity^ threw his influence on the side against renewal^ on 
the grounds that ^^the Constitution did not originally authorize 
Congress to grant the charter/^ hence a renewal of it would 
be unconstitutional for the same reason. Five years later Mr. 
Clay was a strong advocate of the establishment of the Second 
Bank of the United States^ having reversed his former opinion 
on the question of constitutionality. 

The decisive vote for renewal was taken in the House ou 
January 24, 1811, and failed by a majority of 165 to 64. The 
Senate voted on a similar bill on February 20, resulting in a 
tie — 17 to 17, whereupon George Clinton, the Vice President, 
cast the deciding vote against the bank. The bank went into 
liquidation and paid the shareholders $434 for each share of 
$400. Irresponsible state banks now sprang into existence 
everywhere, hoping to reap the profits heretofore enjoyed by the 
Bank of the United States. The country was flooded with 
paper money, secured by insignificant reserves. In this state 
of affairs, with its financial machinery disorganized, the country 

in the following year entered upon a war with 
Expansfon Great Britain. A more reckless and unfortunate 

condition of affairs could scarcely exist. Bank 
charters were very loosely granted by the various states, and in 
some instances banks were allowed to begin business before 
their capital stock had been actually subscribed, and they traded 
on the money received from depositors. At the time of the 
closing of the Bank of the United States in 1811 there were in 
existence eighty-eight state banks with a combined paper circu- 
lation equal in value to the notes of the United States Bank, 
and hence equal to gold, amounting to $28,000,000. This num- 
ber increased until in 1815 there were 208 banks with $110,000,- 
000 notes outstanding. This unwarranted increase in banks and 
paper money was fast placing the country in a condition where 
disaster was inevitable. In 1814, the British captured the city 



222 HISTORY OF BANKING. 

of Washington and burned the White House. The news spread 
consternation throughout the country and caused a bank panic^ 
resulting in the suspension of specie payments throughout the 
country^ with the exception of portions of New England. There 
the laws had been more stringent and imposed a penalty upon 
any bank which should fail to redeem its notes in coin. This 
had the effect of restraining the over issue of circulating notes, 
and hence the New England banks were able to weather the 
storm, and kept their notes at par with specie throughout the 
crisis. Wherever specie payment was suspended, there deprecia- 
suspension ^^^^ ^^ ^^^ currcucy at once set in, and since the 

of Specie paper money was issued by banks in different 

ayments statcs, uudcr a Variety of laws and conditions, the 

depreciation was not uniform. In New York it was 20 per cent., 
in Philadelphia 24 per cent, and in Baltimore 30 per cent. 
The citizens of New England paid their taxes and other obliga- 
tions in money as good as gold, while those of New York, Penn- 
sylvania or Maryland paid in depreciated paper. The injustice 
of this was apparent, but the government could not remedy the 
evil, since the depreciated paper was the only money to be had 
in a large portion of the country. Government bonds were sell- 
ing at 85 cents on the dollar, although paid for in currency 
worth only 70 to 80 cents. To prosecute a war successfully 
under these conditions would seem a very difficult undertaking. 
Its success must have been due in a very large measure to the 
patriotism of the people. Many of the state banks scattered 
throughout the various states were government depositories, and 
held large amounts of government funds^, but as the depreciated 
currency of one state would not circulate in another the gov- 
ernment was unable to transfer the surplus it might have in one 
locality to places where it was needed to meet public demands. 
To overcome this evil, it became necessary to issue treasury notes. 
The friends of the United States Bank ascribed all of the 
existing evils to the failure to renew the charter of the bank 



FIRST UNITED STATES BANK. 333 

and its resulting consequences^ and this view was generally 
acquiesced in. If the bank's charter had been renewed $7,200^- 
000 in specie need not have been shipped to Europe to pay the 
stockholders^, thus draining the country of a large part of its 
gold and furnishing England with money to prosecute a war 
against us. The increase in the number of state banks would 
have been prevented and their issues of paper money in excess 
of their power to redeem would have been avoided. Secretary 
Gallatin said: ^SSuspension (of specie payments) might have 

been prevented at the time when it took place had 
the^CurTency ^^^ former Bank of the United States been still 

in existence.^' During its life-time the bank had 
regulated the currency by means of its example^, its strength, 
and the fact that it was the fiscal agent of the government. Its 
own notes were always equal to specie and the state banks were 
required to keep theirs up to the same standard, or otherwise they 
w^ould be ^^thrown out'' by the great bank, and no longer re- 
ceived for taxes and government dues. With a bank's notes 
thus discredited its customers would desert it for other and more 
responsible banks or for the branches of the United States 
Bank, located throughout the country. Thus the term "Eegu- 
lator of the Currency" was not a misnomer when applied to 
the great Bank of the United States. 

Notwithstanding the war was over a few months after the 
suspension of specie payments, and commerce resumed its cus- 
tomary channels, no effort was made by the state banks to re- 
sume specie payments. It was not to their pecuniary advantage 
to do so, as long as they could float a large volume of irredeem- 
able paper money. A year passed and yet the banks showed 
The Second ^^ ^^S^ ^^ attempting to resume. The welfare of 

United States the couutry demanded that something should be 

done, and yet Congress had not power to compel 
the state banks to change their policy. Naturally public opinion 
turned in favor of a new bank modeled on the plan of the 



224 HISTORY OF BANKING. 

former one. President Madison^ although opposed to the first 
bank on constitutional grounds^ now in his message of December 
5, 1815^ suggested a national bank as a suitable instrumentality 
for bringing about the resumption of specie payments. Secre- 
tary Dallas urged the organization of such a bank^ and on 
April 10^ 1816^ Congress passed a law creating the Second Bank 
of the United States^ on lines similar to the firsts with a capital 
of $35,000,000. Later on Mr. Webster introduced a bill to 
the effect that after February 20, 1817, the secretary of the 
treasury should receive for public dues only treasury notes, the 
notes of the United States Bank and of those state banks 
which were paying specie on demand. This virtually compelled 
the resumption of specie payments on the date mentioned, after 
a suspension oif two and a half years. 



CHAPTER XXIII. 

BANKING IN THE UNITED STATES. 

SECOND UNITED STATES BANK; THE GREAT BANK WAR; SUFFOLK 

BANK SYSTEM; SAFETY FUND SYSTEM; 

WILD CAT BANKING. 

The charter of the Second Bank of the United States was for 
twenty years. Its capital was $35,000^000, of which amount the 
government subscribed $7,000,000, and in consideration of this 
five of the twenty-five directors were to be appointed by the 
President. The main bank was located in Philadelphia and 
branches were established in different states wherever two thou- 
sand shares or more of the bank^s capital had been subscribed. 
The bank and its branches were to have the deposits of the 
national treasury, transact exchanges, negotiate loans and perform 
other similar duties for the treasury free of charge. The bank 
Charter of the ^'^^ allowed to issuc uotcs in denominations of not 
Second United less than $5 ou the same terms as the first bank, 
that is to say, its aggregate note circulation must 
not exceed its capital stock. Its notes were given preference 
over all others by being receivable for all dues to the United 
States. These notes were payable on demand, and in the event 
of the bank failing to redeem its notes or suspending specie 
payment, it was required to pay interest at 12 per cent, on its 
notes. Congress pledged itself not to grant a charter to any 
other bank during the life of the charter to this. Thus it will 
be seen that the Second Bank of the United States was similar 
in its main features to the first. It was larger, its note issues 
would be greater, and to prevent the bane of irredeemable paper 
money, a penalty in the form of interest was imposed upon it. 
It began business on January 7, 1817, and on the 20th of the fol- 

225 



226 HISTORY OF BANKING. 

lowing February specie payments were resumed and the country 
was once more upon a sound financial basis. 

In 1819 the question of the constitutionality of the bank's 
charter was definitely decided by the Supreme Court of the 
United States in the case of the State of Maryland vs. McCul- 
loch. The United States Bank had established a branch in 
Baltimore. The state of Maryland had enacted a law that all 
bank notes circulating within the state must be printed upon 
stamped paper for which a tax must be paid to the state. The 
branch did not use this paper and declined to pay the tax, 
whereupon the state brought suit for violation of the laws of 
Constitutional- Maryland against Cashier McCuUoch as the ofiicer 
United s^tates ^^ ^^^ bank. The contention was made that the 
Bank Settled branch bank was without warrant of authority 
under the laws of the United States,, and that Congress had no 
power under the Constitution to create a bank. In passing 
upon this question the doctrine of implied powers was fully 
established. Since Congress has the power to lay and collect 
taxes, borrow money and regulate trade, it was decided that it 
had the power "^"^to make all laws which shall be necessary and 
proper for carrying into execution the foregoing powers.'^ In 
rendering the decision of the court in this important case Chief 
Justice Marshall said, ^^It is the unanimous and decided opinion 
of this court that the act to incorporate the Bank of the United 
States is a law made in pursuance of the Constitution. The 
branches, proceeding from the same stock, and being conducive 
to the complete accomplishment of the object, are equally con- 
stitutional and hence the court declared that they were not 
subject to any state taxes or restrictions, since their usefulness 
might thereby be impaired or their existence even destroyed. 

In 1819 a financial panic overspread the country. Banks 
and business houses failed in large numbers and general com- 
mercial distress and depression prevailed. It leaked out that 
irregularities had been practiced in the management of the 



SECOND UNITED STATES BANK. 337 

Bank of the United States, and Congress ordered an inv^stiga- 
tion. A shameful state of affairs was unearthed and the bank 
was found to be on the verge of ruin. The officials seemed to 
have been imbued with state banking fallacies and had paid little 

attention to the restrictions of their charter. They 
Bank Scandals had discounted the uotcs of stockholders on the 

pledge of their stock as security to the amount 
of over $8,000,000. They had also allowed stock to be sold 
and transferred before it was fully paid for. They even ad- 
vanced more than the par value of the stock in some instances. 
Among the requirements of the charter was one that there 
should be no dividends paid on shares that were not fully paid. 
This provision had been repeatedly violated. The president 
and cashier of the Baltimore branch had helped themselves to 
large amounts of money on scant security, and withal the bank 
was well nigh insolvent. It was saved from complete failure 
by its new president, who borrowed $2,500,000 in Europe, 
and took heroic measures to make stockholders pay up. From 
this experience in our banking history we learned the lesson 
that a bank should not loan money on its own shares, much less 
those which are not even paid up, for in order to realize on the 
security it must impair its own capital. Such loans when in 
default become equivalent to the purchase of a bank's own 
stock and that is the same as partial liquidation. In a time of 
stringency such a practice will almost surely put a bank in 
jeopardy. The Bank of the United States got itself into this 
predicament in the panic of 1819, and had it not been for the 
loan secured in Europe and the treasury balance on deposit 
there, it would have been forced to close its doors. 

Under proper management the bank gradually regained its 
wonted strength, and thereafter controlled the financial system 
of the country, rendering valuable service in its capacity as 
^^Eegulator of the Currency,'' and as the fiscal agent of the gov- 
ernment. The people as a whole regarded the institution as their 



228 HISTORY OF BANKING. 

deliverer from the evils of a debased money system^ and^ with the 
exception of a few disgruntled borrowers^ together with stock- 
holders whom the bank compelled to pay up^ and the state banks 
who had been forced to redeem their notes^ it appeared to be 
solid in the confidence and good will of the people. Imagine^ 
then^ the general surprise when in 1829, General Jackson in 
his message attacked the bank, and declared that it had "^^failed 
in the great end of establishing a uniform and sound currency.^^ 
Jackson's People who knew anything about the matter must 

Hostility to have known that this statement was false, and 

yet so great was the popularity of the old hero 
that many were willing to accept anything he said. General 
Jackson^s opposition to the bank could not have been caused 
by financial reasons. He was no doubt led to believe that the 
bank had been hostile to his election and he proposed to destroy 
the ^^monster.^^ President Biddle of the bank declined to allow 
political affairs to influence or in any way meddle with the 
management of the concern, and intimated that he needed no ad- 
vice from the White House. All of this aroused President 
Jackson^s ire and he became convinced that the bank was a 
giant monopoly dangerous to the welfare of the government 
and people, and that it was his duty to destroy it. 

On the other hand, the National Eepublican party, headed 
by Clay and Webster, immediately took sides as defenders of the 
bank against President Jackson. Although the bank's charter 
would not expire until 1836, a bill was introduced into Congress 
in the Spring of 1832 and passed for a renewal of the charter. 
It went to President Jackson in July and he vetoed it with a 
ringing document. President Biddle of the bank was reported as 
having said that he would defeat President Jackson for re- 
election on account of his veto of the bank bill. This threat 
aroused the General, and he declared ^^By the Eternal that is too 
much power for any one man to have in this country,^' and was 
then more than ever determined to destroy the bank. The 



THE GREAT BANK WAR. 229 

presidential campaign was then on, Henry Clay being the op- 
ponent of General Jackson, and the leader of the friends of the 
bank. The bank charter was the chief issue of the campaign, but 
Jackson^s popularity was so great that he won re-election by an 
overwhelming majority. Taking his re-election as 
Banifwa^r ^^ endorsement of his position on the bank ques- 

tion. President Jackson proceeded to deal the 
death blow to what he considered his enemy. On the pre- 
text that the bank was unsafe he ordered the secretary of the 
treasury to remove from it the government deposits, and place 
them in certain state banks. Secretary Duane refused to do 
this, and Jackson removed him and appointed Eoger B. Taney 
in his stead. Taney carried out the wishes of his superior. No 
more deposits were made in the United States Bank and war- 
rants for current expenses soon exhausted the government bal- 
ance there. 

The government funds were then deposited with state banks 
carefully selected with reference to party loyalty. This raised 
a storm of protest from Jackson's political op- 
Removed poncnts, who branded the proceeding as unlawful, 

being a violation of the contract under which the 
bank came into existence. The bank had paid $1,500,000 as a 
bonus for the government deposits during a period of twenty 
years and now it was deprived of the benefits of these deposits 
three years before the expiration of the time. Party feeling 
ran high, and in the ensuing Congress a resolution of censure 
was passed by both houses as follows: Eesolved, that the presi- 
dent, in the late proceeding in relation to the public revenue, 
has assumed upon himself authority and power not conferred by 
the constitution and laws but in derogation of both.^^ The 
president protested against the proceeding, but the resolution 
stood upon the records until 1837, when it was expunged in an 
all-night session of the Senate, after a fierce party struggle. 

The withdrawal of the deposits was a serious blow to the 



230 HISTORY OF BANKING. 

Bank of the United States^ but it continued on until the expira- 
tion of its charter in 1836. It then took out a charter as a state 
bank^ and continued business until 1841^ when it failed. Nicho- 
las Biddle was reduced from wealth to pauperism. Thus ended 
the great bank war^ in a triumph for President Jackson. Specie 
payments were suspended again in 1837^ the only retaliation 
against Jackson^s victory, and the country was again to struggle 
for a time with state banks and wildcat currency. 

The state banks in existence in 1833^ when Andrew Jackson 
transferred the deposits to them^, were of all kinds^ based upon 
every conceivable system and form of legislation. It seemed as 
though the period of nearly thirty years just prior to the enact- 
ment of our National Banking Act was to be used for testing 
every theory and making every experiment that could be neces- 
sary in order to culminate finally in the national banking system. 
The banks in Massachusetts were the best managed. Being 
under severe restrictions^, and a penalty in case of failure to pay 
specie on demand^ they were the most stable. The ^^Suffolk 
Bauk System^^ of Boston also acted as a powerful check against 
improvident management. This system arose from the deter- 
mination of the solvent banks of Boston to compel the smaller 
banks located in the remote corners of the state to redeem their 
notes by keeping on deposit in Boston a fund for this purpose. 
The notes were presented daily through a clear- 

Suffolk Bank . , . i xi -u i 

System ^^S housc^ m Very much the same way as checks 

are cleared. Any bank refusing to keep a fund 
for this purpose was liable to have its notes thrown out or re- 
fused^ and thus be discredited. This system, which at one time 
included over five hundred banks, served to restrict note issues 
and proved a valuable expedient for the time being. 

In New York the ^^Safety Fund System^' was established, by 
which each bank was required to deposit with the state treasurer 
three per cent, of its capital as a fund for the security of note 
holders and depositors, In case the fund became exhausted 



IN NEW ENGLAND. 231 

all the solvent banks were to be taxed to replete it. The fund 
was afterwards set aside for the protection of note holders only, 

it having been found wholly insufficient to protect 
sy^'^nf ""^ both note holders and depositors. The ^^Safety 

Fund System^^ resembled in many respects the 
present Canadian banking system, which has a safety fund of 
five per cent, as a protection for note holders. Other expedients 
were tried in various states. In some of them the state had a 
voice in the management of the banks and in others it was a 
sharer in the profits. Thus the country went, feeling its way, 
until the panic in 1837 caused hundreds of banks to fail, no 
doubt covering up many an instance of defalcation and dis~ 
honesty. That panic proved that the safety fund system of 
New York was wholly inadequate, and that state then adopted 

the "Free Banking System,^^ which permitted any- 
systenf"*^^"^ one to form a bank and issue notes without a 

charter from the legislature, as had been the 
custom in the past. The notes must be based, however, upon 
either United States bonds or bonds of the State of New York, 
or approved real estate security, deposited with the state treas- 
urer. In case of the failure of a bank the state treasurer was 
authorized to sell the securities and apply the proceeds to the 
redemption of the outstanding notes of the bank. Other states 
copied after the free banking system of New York, and it 
became very popular. The merits of the system depended chiefly 
upon the quality of the securities and the convertibility of them 
in a time of stringency. Eeal estate mortgages were subject to 
great depreciation and at forced sale bonds often brought much 
less than their face value. 

In some other states no adequate attempt was made to pro- 
tect the note circulation or supervise the banking system, and 
the result was a large number of banks of the most irresponsible 
character, many of them permeated with dishonesty, so bad as to 
win the title of Wild Cat Banks. Senator Sherman, in his "Eec- 



232 HISTORY OF BANKING. 

oUections/^ referring to wild eat banking in the 40's and 50s, 
says: ^"^We had every diversity of the bank system devised by the 
wit of man^ and all these banks had the power to 
Banking issiie paper money. There was no check or con- 

trol over them.^^ Manifold evils resulted from 
this want of uniformity and of public regulation. Coun- 
terfeiters plied their dishonest practices to an alarming extent, 
and there were 5,400 spurious notes catalogued as being in 
circulation at one time. ^^Counterfeit Detectors'^ and ^^Bank 
Note Eeporters'^ were important publications to which bankers 
and merchants subscribed, in order to be posted on the spurious 
bills in circulation. Disputes between buyer and seller as to the 
goodness of the bank notes were of almost constant occurrence, 
and if there was a bank in the town the cashier was constantly 
appealed to for his opinion on the genuineness of notes in 
circulation. 



CHAPTER XXIV. 

BANKING IN THE UNITED STATES. 

NATIONAL BANKING SYSTEM; ORGANIZATION; RESERVE; 
CIRCULATION; SUB-TREASURY SYSTEM. 

When the Civil War broke upon the country it found the 
national goyernment illy prepared to meet the enormous expendi- 
tures which a war entails. The treasury was almost empty^ and 
yet vast amounts of money were needed at once. Gold had been 
hoarded and exported in anticipation of war to such an extent 
that in the winter of 1861 the banks suspended specie payment. 
This left no circulating medium except the state bank notes. In 
1862 and 1863 the government^ to relieve the situation^ issued 
$450,000^000 of government notes, called ^'greenbacks/' with 
which it purchased the munitions of war and paid its expenses, 
but depreciation set in and further issues of such notes were 
stopped. It then became necessary for the govern- 
u. s. Bonds ment to borrow money, and issue its obligations in 
the form of bonds. In order to find a market for 
those. Secretary Chase, of the treasury department, proposed to 
offer as an inducement to their purchase certain banking priv- 
ileges. He worked out the scheme of our national banking 
system and urged the organization of national banks, first in 
his report of December, 1861, and again in 1863. The chief 
points of advantage in his scheme were that it would create a 
demand for government bonds, in return for which the national 
treasury would receive large amounts of much needed cash, 
and second it would give the country a safe, uniform and stable 
note circulation. After much consideration Congress passed 
the National Banking Act, and in February, 1863, it received the 
president's signature and became a law. 

233 



234 HISTORY OF BANKING. 

The original act was crude and unsatisfactory and has been 
often amended, but the general features of the system remain. 
In 1864 an amendment was made forbidding national banks from 
making loans on landed security, which had been permitted by 
the original act. The law was so framed as to enable state banks 
to become members of the national system by the simple process 
of conversion without reorganization. Every inducement was 
made to the state, banks to lead them into the system, but they 
were slow to make the change. On March 3, 1865, a law was 

enacted imposing a ten per cent, tax per annum 
statelsanks^ npou the uotc issucs of all state banks. This was 

a death blow, as it was intended to be, and drove 
the state bank notes out of existence, leaving the field clear to 
the national bank circulation. Following this law the state 
banks rapidly came into the national system, and on the first 
of January, 1867, there were $291,093,294 of national bank 
notes in circulation. The large increase in the number and 
capital of the national banks meant an increased demand for 
government bonds, which in turn meant vast receipts of cash 
to the government treasury. Government bonds had been pre- 
viously selling at 7 per cent, discount. The demand raised 
their price above par and thus the system proved of the greatest 
assistance to the government. 

But the 10 per cent, tax which virtually made state bank 
issues unprofitable and hence impossible, aroused considerable 
opposition on the part of the state bankers. Congress was 
accused of overstepping its constitutional limitations in its at- 
tempt to interfere with state institutions. Suit was brought by a 
bank in Maine to recover the tax which it had paid, and in the 

brief submitted to the United States Supreme 
ity^ofthe Law' Court, thc Contention was made that the state had 

a right to charter a bank and empower it to issue 
circulating notes. This right had been exercised by all of the 
states from the foundation of the republic, without objection 



NATIONAL BANK ACT. 235 

or interference from Congress. It had been recognized and 
upheld by the Supreme Court itself in a previous ease. Now to 
subject the bank to a tax of ten per cent, was virtually to destroy 
this right;, and thus encroach upon the prerogatives of the state 
in a manner unwarranted by the Constitution. The court 
decided that ^^Congress had the undisputed power to provide a 
currency for the entire republic^, and that in the exercise of that 
power it mighty, if it saw fit, by taxation or otherwise restrain 
the circulation of any notes not issued by its immediate author- 

ity." 

Thus was formed a national banking system infinitely more 
powerful than the bank which Jackson waged a war upon, on 
account of his belief that it concentrated too much power in the 
hands of a few men, but a system which has proven all of Jack- 
son's fears to be groundless. The favoring conditions in the 
formation of the national banking system were the stress of war, 
and the assumption of implied powers by the government made 
necessary in order to carry on its struggle for existence. 

The principal features of the national banking system are 
as follows: 

A currency bureau has been established as a department of the 
treasury, under the management of an officer called the Comp- 
troller of the Currency. This bureau is charged with the execu- 
tion of the banking law and the regulation of all details of the 
organization and management of national banks, the issue to 
such banks upon receiving their deposits of United 
Bureau ^ Statcs bonds, the appointment and supervision of 

inspectors of banks, etc. The Comptroller must 
not be interested in any national bank either directly or indi- 
rectly. He must make an annual report to Congress of the 
conditions of all national banks. 

At least five persons are necessary to form a national bank. 
Articles of association setting forth all of the details concerning 
the proposed bank, its name, place of business, capital; etc., are 



286 HISTORY OF BANKING. 

signed by the five stockliolders and transmitted to the Comp- 
troller at Washington, who, upon approving them and satisfying 
himself as to payment of the capital and compliance with other 
Organization requirements of the law, issues a charter for twenty 
of National ycars. Tliis charter may be renewed for a like 

term of twenty years. The law authorizes national 
banks to exercise by its board of directors or duly authorized 
officers or agents, subject to law, all such incidental powers as 
shall be necessary to carry on the business of banking; by dis- 
counting and negotiating promissory notes, drafts, bills of ex- 
change and other evidences of debt; by receiving deposits; by 
buying and selling exchange, coin and bullion; by 
Busin^ss^^^ loaning money on personal security, and by ob- 

taining, issuing and circulating notes.^^ But they 
are not permitted to loan money on real estate security or hold 
real estate except such as is necessary for the conduct of ^he 
business, or may have been acquired in liquidation of previous 
obligations, and then only until it can be disposed of without 
sacrifice. 

The affairs of the national banks are managed by a board of 
not less than five directors, elected annually by the stockholders, 
as in the case of other corporations, except that all directors 
of national banks must be American citizens, and own at least 
ten shares of stock. Stockholders are under the 
stockhoMcrs ^^double liability'^ obligation, i. e. every stockholder 
is liable for all of the debts and liabilities of the 
bank to the extent of the amount of the par value of his stock 
and as much more besides. 

At least one-half of the capital stock must be paid in before 
beginning business and the balance in five equal monthly install- 
ments. The amount of the capitalization of the bank is also con- 
trolled by law, and depends upon the population of the town or 
city in which the bank is to be located. In cities of 3,000 or 
less population the capital must not be less than $25,000, in 



NATIONAL BANK ACT. 237 

cities of more than 3^000 and less than 6,000 the capital must be 
not less than $50,000, in cities of more than 6,000 and less than 

50,000 the capital must be not less than $100,000, 
Capital and in cities of 50,000 or over it must be not 

less than $200,000. A bank with a capital of 
$150,000 or less must deposit with the Treasurer of the United 
States government bonds equal to one-fourth its capital. A bank 
with a greater capital must deposit at least $50,000 in bonds. 
These bonds may be used as a basis for circulating notes or not, 
according to the option of the bank. No bank is compelled to 
issue notes. 

A national bank may issue circulating notes to the amount of 
90 per cent, of the par value of the government bonds deposited 
with the Treasurer of the United States.* The Comptroller 
furnishes suitable notes, in blank, in denominations of $5, $10, 
$20, $50, $100, $500 and $1,000, and these when signed by the 

oflBcers of the bank are ready for issue over the 
Circulation bank's couutcr. Bank notes are receivable in all 

parts of the United States in payment of taxes, 
excises, public lands, and all other dues to the United States 
except duties on imports and interest on the public debt. 

Each national bank is required to keep on deposit with the 
Comptroller of the currency a deposit equal to five per cent, of 
its circulation, as a fund for the redemption of its worn out or 
mutilated notes. When notes become worn, defaced or mutilated 
so that they are no longer fit for circulation they will be replaced 
with new notes by the Comptroller. The old notes are then 
^'macerated'^ or destroyed by the process of grinding them to a 
pulp. Whenever the redemption of notes for any bank amounts 
to $500 it is called upon to replenish its deposit. 

Any bank desiring to reduce its volume of circulating notes 
may do so by paying into the United States treasury either the 



♦This was the original provision of the law, but by the Act of 1890 the 
limit was raised to the par value of the bonds deposited. 



238 HISTORY OF BANKING. 

notes themselves or a sum of lawful money with which the Comp- 
troller may redeem them^, and a corresponding amount of gov- 
ernment bonds will then be released from deposit 
^^ItZn'""^ and returned to the bank. To prevent any sud- 
den or serious contraction of the currency of the 
country^ the law prescribes that not more than $3^000^000 of 
notes shall be retired by all of the banks in any one month. Of 
course no bank can withdraw bonds below the minimum required 
to be deposited irrespective of circulation. Certain enumerated 
cities in various parts of the country are denominated ^^reserve 
cities/^ among which are New York^ ChicagO;, Boston, Cincin- 
nati, Baltimore, Albany, Cleveland, Detroit, Philadelphia, St. 
Louis, San Francisco, Milwaukee, Louisville and Washington. 
The banks in these cities are required to keep on hand a sum 
of money equal to 25 per cent, of their deposits. Banks in other 
cities are required to keep a reserve of 15 per cent., but three* 
fifths of this may consist of deposits with banks 
Reserve in rcscrvc citics. The five per cent, redemption 

fund on deposit with the Comptroller may be 
counted as a part of the reserve. When a bank^s cash falls below 
the reserve limit, it is forbidden to increase its liabilities by 
making new loans or discounts, or to declare further dividends 
until the cash reserve is restored. Failure to restore the reserve 
may subject the bank to forced liquidations at the discretion of 
the Comptroller. 

The safety of the banks is guarded by the law through a 
number of wholesome restrictions, among which are, that no 
real estate acquired under judgment decrees or 
Restrictions mortgages may be held for more than five years. 

Xot more than one-tenth of the capital of the 
bank may be loaned to one individual, corporation or firm, 
directly or indirectly, nor may any bank lend money on its own 
shares, but they may be taken as security for a debt previously 
contracted in good faith. Unearned dividends must not be 



NATIONAL BANK ACT. 239 

declared. If the capital is impaired by losses^ the deficit must be 
made good by an assessment on the shareholders if necessary. 
One-tenth of the net profits must be annually added to the sur- 
plus fund until the fund shall amount to 20 per cent, of the 
capital. 

Every national bank is required to make not less than five 
reports of its condition each year to the Comptroller^ verified 
by the oath of the president or cashier and the signatures of at 
least three directors. In addition to this special reports as to 

dividends and earnings are made each half year. 
Exa^ners Eeports are usually called for a prior date^ so as 

to give bank officials no opportunity to patch up 
affairs. As a further safeguard, bank examiners are employed 
by the Comptroller, whose duty it is to make a thorough exam- 
ination of the affairs of all national banks, inspect books, securi- 
ties, assets and liabilities, and report the results of such finding 
to the Comptroller. 

The Comptroller also has charge of the settling up of the 
affairs of failed national banks. He appoints the receivers and 
fixes their compensation. All money received for the assets of 
the bank is turned over to him and he pays out dividends to 

creditors. The Comptroller also declares the bonds 
FauTd Banks ^^^^ ^^^ Security of circulation forfeited, and gives 

notice to the holders of all notes of the defunct 
bank to present them at the treasury for payment. 

In the early days of the national banking system circulation 
was extremely profitable. Government bonds bore five and six 
per cent, interest and kept constantly increasing in value, and 
this, added to the profits on circulation issued against the bonds, 
acted as a strong inducement to the organization of national 
banks. In consequence of this increase in the number of banks 
of issue the volume of bank notes constantly rose until in Decem- 
ber, 1874, it amounted to $354,394,346. From this point it 
experienced a slight falling off until in 1883 it reached high 



240 HISTORY OF BANKING. 

water mark in a volume of $362,651,169. The retirement of 
bonds by the government and refunding them at lower rates 
of interest then acted to reduce the volume of circulation and 
Volume of ^^ ^^^ ^^^^ ^^ l^^l to $167,927,974. Since then 

Bank Note it has showu incrcascs whenever there have been 

Circulation ^^^^ .^^^^g ^^ ^^^^^ rpj^^ ^^^ ^j -^qqq permitted 

banks to issue notes to the amount of the paid in capital and to 
100 per cent, of the market value of the bonds deposited, pro- 
vided this did not exceed their par value. The tax on circulation 
was reduced from one to one-half per cent, and the effect has 
been an increase in the volume of bank note circulation. 

It will thus be seen that the aggregate circulation depends 
approximately upon the current price of bonds and not upon the 
demands of business. When it is profitable to issue notes the 
banks do so, and when the market price of bonds insures to 
their owners better profits than by the deposit of them to secure 

circulation, then the banks contract their circula- 
thf curre^nc^^ ^^^^' ^^ ^^^^ happens that frequently when there 

is the greatest need of a large circulation in order 
to carry on the business of the country, the price of bonds makes 
it advantageous to the banks to reduce the volume of their notes, 
and surrender their circulation. This is one of the serious 
defects of our currency system. Real elasticity, whether of 
contraction or expansion, to adapt its volume to the needs of 
business is unknown under this system. But were expansion f 
and contraction even possible under our system, it would be too } 
slow and cumbersome to meet the requirements of business. ) 
Bonds must be sent to Washington, notes must be printed, for- ^ 
warded and signed, all entailing a delay of several weeks, before I 
the money is ready for circulation. A money stringency might » 
arise, produce its unfortunate results and subside before the 
needed relief could be obtained through the channel of the ex- * 
pansion of bank note circulation. ? 

The sub-treasury system of the United States seems to ag- * 



SUB-TREASURY. 241 

gravate rather than correct the shortcomings of our bank note 
circulation^ by locking up in the vaults and thus withdrawing 
from circulation many millions of dollars more than the govern- 
ment requires to meet its current obligations just at a time when 
it is most needed in circulation. Under our system of indirect 
taxation this locking up of money proceeds at a greater rate 
when business is prosperous and a larger volume of currency is 
needed in the channels of trade than when business 
System^*^"*^^ is dull^ f or the reason that in Active times im- 
portations are greater and th-e consumption of 
those luxuries which are taxed under the internal revenue law 
is greater^ thus increasing the government receipts both from 
customs and internal revenues. 

A system of asset banking somewhat after the Canadian 
method has been advocated for the United States as a relief 
from the objections to the sub-treasury system and the fast and 
hard rules of the National Banking Act. Certain it is that we 
need a more elastic circulating medium^ and it is almost equally 
certain that a system of branch banking would be a decided 
advantage to the country. The National Banking Act has served 
the country so long and well that there is a reluctance to dis- 
place it, but there is also a strong feeling that reform is needed 
in our currency system to adapt it to changing conditions. 

In order to maintain the country upon a specie basis it is 
necessary for the United States treasury to keep a large specie 
reserve on hand. The amount of this reserve has been fixed at 
$150,000,000.* Under the ^'parity'' clause of the 
Reser^f act of 1890 it was declared to be the policy of the 

United States to maintain the two metals (gold 
and silver) on a parity with each other. In order to do this, when 
treasury notes are presented for payment, they are paid in either 
gold or silver, as the holder demands. In the spring of 1893 



♦This amount was originally- $100,000,000, but was increased in 1900 to 
$150,000,000. 



242 HISTORY OF BANKING. 

the reserve in the treasury fell below the $100,000^000 mark, 
owing to large exportations of gold. By the following January 
the reserve had fallen to $65,650,000, and a feeling of fear 
spread over the country lest the treasury should be unable to 
maintain the reserve and values should go to a silver basis. 
The Secretary of the treasury sold $50,000,000 gold bonds on 
about a three per cent, basis and replenished the reserve. The 
redemption of notes continued, however, and by the following 
August (1894) the reserve had fallen to $52,000,000. In the 
following November another issue of $50,000,000 was made to 
restore the reserve. In January, 1895, $65,000,000 more of gold 
bonds were negotiated and the proceeds placed in the reserve, 
and in February, 1896, a fourth issue of $100,000,000 of bonds 
was resorted to, which served to maintain the reserve until the 
tide turned and gold began to flow into instead of from the 
United States treasury. This process of redeeming treasury 
notes in gold and issuing them again only to have them in turn 
presented for redemption in gold again, was called ^^the oper- 
ation of the endless chain.^^ 

Prior to 1861 no notes not bearing interest were issued by 
the United States treasury, but on July 17, 1861, Congress 
directed the issue of $50,000,000 of demand notes in denomina- 
tions of less than $50 in exchange for coin or in payment of 
debts due the government. These were the first "sinews of war" 
in the form of "greenbacks.^' The act of February 25, 1862, 
increased the issue to $150,000,000. These notes were a legal 
tender for all debts public and private except customs duties 
and interest on the public debt. On June 11, 1862, Congress 
increased the issue to $300,000,000 and on March 3, 1863, to 
$450,000,000. After the war Congress gradually 
Notls ^^^^ reduced the volume, but by the act of April 12, 
1866,limited the retirement to $10,000,000 month- 
ly for six months and $4,000,000 monthly thereafter. Dur- 
ing the panic of 1873 the retirement of notes was discontinued 



UNITED STATES NOTES. 243 

and the volume outstanding increased by nearly $27,000,000, 
bringing the total up to $382,979,815. But the act of January, 
1875, provided for further reduction, and declared that on 
January 1, 1879, specie payment should be resumed. In order to 
prepare for the resumption of specie payments it was deemed 
wise in May, 1878, to prohibit the further cancellation of ^*^green- 
backs'^ and the amount has therefore stood ever since at $346,- 
681,016, as it was at the close of business on the day the act 
went into effect. 

The secretary was authorized by the act of March 3, 1863^ 
to receive deposits of gold coin and bullion and to issue therefor 
certificates in denominations of $20 and upward, payable on 
demand. The coin was to be held in the treasury for the re- 
demption of the certificates. There were in circulation on July 
1, 1901, gold certificates amounting to $247,036,359. These 
certificates are not a legal tender but are receivable for customs, 
taxes and all public dues. They are also available for the 
reserves of national banks. 

Silver certificates are issued upon deposits of silver dollars, 
under the act of February 28, 1878, which authorized the coin- 
age of the dollars. At first all deposits were limited to $10 or a 
multiple thereof, and certificates were issued only 
Certificates ^^^ ^^ ^^^^ denominations, but the act of 1886 pro- 
vided that certificates might be issued in denomina- 
tions of $1, $2 and $5. The issue is limited to the amount of 
silver actually deposited in the treasury. The certificates are 
not a legal tender, but may be held by national banks as a part 
of their reserves. The volume of silver certificates outstanding 
on July 1, 1901, was $429,643,556. 



CHAPTEE XXV. 

BANKING IN THE UNITED STATES. 

STATE BANKS; PRIVATE BANKS; SAVINGS BANKS; 
TRUST COMPANIES. 

A large number of banks exist and flourish under state regu- 
lations. Many of them were organized and engaged in business 
prior to the formation of our national banking system and de- 
clined to enter that system, but the larger portion have since 
been organized from time to time to meet the real or supposed 
needs for better banking facilities in the communities in which 
they are located. As previously stated, by an amendment to 
the National Banking Law in July, 1866, the government im- 
posed a tax of ten per cent, upon the note circulation of all 
state banks. The purpose of the tax was to drive the state bank 
notes out of circulation and thus make room for the national 
bank currency, and it accomplished its purpose perfectly. In 
other respects, however, the state banks were unaffected and have 
continued to do business in the same way, subject only to the 
regulations imposed by the laws of the states in which they are 
situated. A state bank discounts notes and drafts, receives 
deposits, buys and sells exchange and performs all the regular 
functions of any bank. Its internal mechanism and organization 
of officers and clerks is substantially the same as those of a 
national bank. The state laws usually require a directory of 
five or more persons to manage the affairs of the bank, and it 
must be a regularly organized corporation, formed and conducted 
in compliance with the statute. 

While national banks are usually considered as possessing 
decided advantages over state institutions, the latter in turn 
have, in the opinion of some bankers, decided advantages, among 

244 



STATE BANKS. 245 

which may be mentioned: They are not subject to such severe 
restrictions as to capital, reserve, etc.; are not examined so criti- 
cally; are not, in many states, required to make 
state Banks Tcports or rctums; have greater liberty in the 
making of loans, and may certify checks in excess 
of the amount which the depositor has on deposit. This latter 
right is strictly and rigidly denied to national banks, and at first 
thought would seem to be only a wholesome restriction as applied 
to any bank, but in certain classes of transactions, notably those 
connected with the stock exchange, it may be necessary for a 
bank to certify in excess of the deposit. While the practice is 
clearly objectionable it may be necessary under certain con- 
ditions. The banking laws of the different states are very dis- 
similar and produce the same variety in the character of the 
banks formed under them, so that in order to understand the 
requirements and restrictions under which state banks exist, it 
will be necessary to consult the statutes of the different states. 
Next lower in the order of size and importance come the 
private banks.* These differ from state banks, being usually 
not corporations with a fixed capital divided into shares and con- 
trolled by a board of directors, but having an 
Private Banks indefinite Capital owned entirely by one or more 
persons. The stockholders in a state bank are 
limited in their liability to the bank, but in the case of a private 
bank the owners or stockholders (in case of a stock company) 
are individually responsible for the liabilities of the bank without 
limit. Private banks usually grow out of favoring conditions. 
In a town too small to justify the organization of a national 
bank with a capital of $25,000, and yet needing banking facili- 
ties, a leading merchant who is well known as a responsible man, 
decides to open a bank as an annex to his store. His bank 
commands the confidence of the public, on account of his repu- 



*In 1902 there were 1,302 state banks in the United States, according 
to the Comptroller's repoxti 



^46 HISTORY OF BANKING. 

tation for wealthy character and honesty. Or some man who 
is in the habit of buying notes or making small loans at remuner- 
ative rates^ finally concludes to enlarge his office^ and hangs out 
his sign as a banker. The capital of a private banker may be 
small^ but he is well known in the community and is esteemed 
for his ability and integrity. His bank is not subjected to 
any examination by state or national authorities^ nor is he re- 
quired to make reports or publish statements of the bank's 
condition. Such is the origin of many of the private banks. As 
the resources of the community grow and the business of the 
private bank gradually expands^ it is frequently organized into a 
state bank or merged into the national system. 

As to the details of management of private banks^ these are, 
or should be^ in compliance with the rules of larger institutions. 

Even private bankers cannot ignore the rules of 
Management safe banking without sooner or later suffering the 

consequences. In rare instances the practice has 
been adopted by private bankers of making public reports of 
their condition^ and these reports have been published along 
with those of state and national banks^ as a means of inspiring 
public confidence. The private banker can offer to his customer 
the advantages of unlimited liability for every obligation of the 
bank^ and a greater concentration of responsibility^ with a 
stronger sense of direct personal interest in the welfare of the 
concern than is felt by either the directors or officers of in- 
corporated institutions^ either state or national. The best guar- 
anty which a customer can have of the soundness of his bank is 
the integrity and ability of its management, and the private 
banker can offer this as well as the state or national bank. 

SAVINGS BANKS. 

During the latter part of the 18th century there seemed to 
be a general advance in the spirit of fraternal and provident 
societies in Europe and especially in England, and out of this 



SAVINGS BANKS. 247 

grew the mutual savings bank as a means of taking care of the 
poor who came to want by improvidence or misfortune. The 
earliest institution of this kind was established in 1765^ but not 
until about the close of the century did these institutions become 
permanently established. In 1816 and 1817 the need of savings 

banks became apparent in New York and Boston. 
Sav^ngs°Banks '^^^ couutry was then becoming well settled and 

the people were able to accumulate a surplus out 
of their earnings^, but poverty prevailed throughout the country 
generally, on account of the improvidence of the people, who 
squandered their earnings and paid no attention "to those small 
but frequent savings when labor is plentiful which may go to 
meet privation in unfavorable seasons.^^ A bill was introduced 
into the New York legislature in 1819 and passed, for the in- 
corporation of savings banks, and continues, with some modifi- 
cations, as the basis of the savings bank system of the state at 
the present time. 

In 1900 there were in the United States 1,007 savings banks, 
with deposits aggregating approximately $2,600,000,000, held 
in the name of 6,000,000 depositors. This vast sum represents 
the accumulated savings of a large class of people, especially 
those who are inexperienced in handling or investing money and 
whose savings are too small to loan or invest to advantage. The 

savings bank offers to the weak the aid of the ex- 
Character pericnced who understand finance, to receive their 

small gains and hold them securely against that 
time when need or desire may require the store for prudent use. 
"It accumailates money; it inspires and trains men to get money 
and to the wise use of it; it adds to the sum of national resources 
in money, and adds to the means for advancement in material 
improvement.^' Many state banks combine the functions of 
banks oi discount with those of private savings banks, and while 
the character of the two are entirely different there is no con- 
flict between them. The savings bank aims to gather wealth 



248 HISTORY OF BANKING. 

while the commercial bank uses it, and turns it into the channels 
of business. The profits of the savings bank^, of the mutual kind, 
go to the depositors;, while the profits of the ordinary commercial 
bank go to the stockholders or owners. ^^The savings bank opens 
its doors to savers; it receives and permanently invests money. 
The bank opens its doors to borrowers and users of money, for 
pay. One serves by receiving and keeping, the other serves by 
lending. The savings institution is a receiving reservoir from 
little springs; the bank is a distributing reservoir of accumulated 
capital.^^ 

Savings banks in the United States differ from those in 
England in not being required to invest their funds exclusively 
in government securities. Thus of the $2,600,000,000 on de- 
posit in our savings banks in 1900, 30 per cent, was loaned out 
on real estate, 18 per cent, invested in state and other stocks 
and bonds, 11 per cent, in railroad bonds and stocks, and 3 
per cent, in government bonds. While the ordinary discount 
bank must keep its funds as free as possible from permanent in- 
vestments such as real estate loans, the savings bank pursues 

exactly the opposite course, its favorite form of 
Investments investment being real estate loans. The savings 

bank does not hoard its money. It does not en- 
gage in speculation, but makes investments in solid securities 
of recognized value. 

In the eastern states nearly all of the savings banks are con- 
ducted upon the mutual plan. Their capital consists of the 
deposits, and the depositors are the owners of the bank. The 
business of the bank is managed by a board of trustees who re- 
ceive no compensation for their services. The only salaries 

paid are to those officers and clerks who give their 
Mutual entire time to the business. The income arises 

from interest on loans, and after taxes and running 
expenses are paid, the net profits go to the depositors as inter- 
est or dividends. This system seems to most nearly accomplish 



PRIVATE BANKS. 249 

the object for which such institutions were formed, as it gives 
the depositor the full benefit of whatever profit may arise from 
the conduct of the business. 

In the western states and on the Pacific coast most of the 
savings banks are private institutions, organized and conducted 
for the benefit of the owners, the same as other banks, and 
paying a fixed rate of interest to depositors. Such institutions 
have a fixed capital and maintain a reserve to meet withdrawals 

and secure the confidence of the public. They 
Private corrcspoud to statc banks, being usually subject 

to certain requirements and restrictions of the 
state laws, intended for the better security of depositors. Of 
course it is largely a question of management whether a savings 
bank is secure or not, either by the mutual or private system. 
All the law can do is to hedge about the interests of depositors 
and place restrictions upon officers. The depositors themselves 
must judge as to the ability and integrity displayed in the man- 
agement of the institution. 

The rules for the conduct of the business differ widely in 
different savings banks. Some receive deposits as low as a dime, 
while a dollar is the limit in others. Some allow interest only 
on the smallest balance of the half year, while others compute 
the interest upon monthly balances. Money withdrawn before 
the end of the month or half year is not entitled to interest for 

the time it was on deposit. Most banks, as a means 
Rules of protection to themselves, may require thirty 

or sixty days' written notice from depositors be- 
fore money can be withdrawn. This regulation is only enforced 
in time of panic to enable the bank to realize on its loans or 
securities 

TEUST COMPANIES. 

During the past twenty-five years there has developed in the 
United States a class of financial institutions called Trust Com- 
panies, combining the functions of a bank with those of a 



250 HISTORY OF BANKING. 

fiduciary agent. They receive deposits and make loans, but of 
a different character from those of ordinary banks. It is the 
policy of conservative banking to make only short 
Funcirons ^™^ loaus, and upon collaterals or upon mercan- 

tile paper — such as is given for goods sold. Every 
commercial bank aims to avoid getting its funds locked up in 
fixed property such as real estate, upon which it would be diffi- 
cult to realize in case of a financial stringency. On the other 
hand, trust companies aim to make long time loans on real 
estate or other sound security. Their money consists largely of 
trust funds belonging to estates, for which they act as adminis- 
trators, executors or assignees, and from the nature of these 
deposits they are privileged to loan them out on long terms. 
Trust companies act as conservators of those who are not com- 
petent to manage their own estates, guardians of minor children 
whose estate they may hold until the heirs reach majority, when 
it is divided; assignee and receiver in cases of insolvent firms 
or corporations, etc. They also act as trustee in corporation 
mortgages, and registrar and transfer agent in case of bond 
Functions issucs by railroads and other large corporations, 

of Trust They do a general financial business for bankers 

ompanies ^^^ othcrs, collcct rcuts and interest, make invest- 

ments, hold titles, pay annuities and execute wills and other 
trusts. With the growth of capital and complications of invest- 
ments, trust companies have become important agents in our 
financial and commercial system, and are now almost a necessity 
in floating bond issues and promoting large enterprises. They 
are state institutions, being organized under statutes or special 
charters from the legislatures of the states in which they are 
located. 

Suppose some large enterprise is to be carried through, such 
as the building of a railroad, requiring a large capital, much 
in excess of that which the managers or promoters of the enter- 
prise would be able to furnish of their own. Many other people 



TRUST COMPANIES. 251 

are able and willing to furnish funds for the enterprise, but at 
once the query arises, How do they know that their investment 
will be a safe one? How do they know that the company has 
been properly organized; that the title to the property is clear 
and perfect, and that there has been no over issue of bonds? 
Each prospective investor could insist upon investigating the 
affairs of the company and having all of these and many other 

similar queries answered to his satisfaction before 
Enterpdse^" parting with his money, thus making the financing 

of the enterprise almost impossible. Just here 
the trust company is very serviceable. By assuming the registra- 
tion and issue of the bonds, the character of the securities, so 
far as genuineness, title, etc., are concerned, is established. The 
trust company takes title to the property under the mortgage, 
issues the bonds, pays the interest, and in fact transacts the whole 
business, turning over the proceeds from the sale of the bonds 
as the money is paid in. Purchasers of bonds rely upon the trust 
company to see that there has not been an over issue of the 
bonds. 

Another important service rendered by trust companies is in 
issuing stock for large corporations, and in case of sale, making 
transfers of same. When the stock is listed on the stock exchange 
this is an assurance to buyers that the stock is genuine, and there 
has not been an over issue. Then again, it enables purchasers 
to have the stock properly transferred without the necessity of 
sending the certificates to the headquarters of the company,, 
which may be a considerable distance away. For instance, a 
corporation in Omaha desiring to have its shares listed on the 
Chicago Stock Exchange may make an arrangement with a 
trust company in Chicago to attend to the registration and 
transfer of its stock, as a convenience to buyers, and it is not 
then necessary for a buyer to send his certificates to Omaha to be 
transferred. That can be done by the trust company here. 



CHAPTER XXVI. 

BANKING IN THE UNITED STATES. 
THE UNITED STATES TREASURY. 

As before related^ President Jackson removed the government 
funds from the United States Bank in 1833, and placed them in 
various state banks, located in various parts of the country, 
on the plea that the bank was unsafe. This he did, not by 
actually removing the money, but by a process which resulted 
the same — depositing all fresh receipts of cash in the state 
banks and drawing all government warrants for payments of 
money against the balance in the United States Bank until that 
balance was exhausted. Prior to this time the government 
had kept its funds in its own banks, or those which it virtually 
controlled, with the exception of an interval of five years (1811- 
1816) between the expiration of the charter of the First and 
the formation of the Second United States Bank. These gov- 
ernment banks had, during a period of nearly forty years (1789 
to 1811 and 1816 to 1833) performed two highly useful and 
important functions in connection with the financial system of 
the country — ^they had acted as the fiscal agent of the govern- 
ment in collecting and disbursing the public revenues, and they 
had maintained a uniform standard of value in 
the^Deposits ^^^ moucy of the country. During the period 
(1811 to 1816) when there was no government 
bank as a "regulator of the currency'^ the people suffered severely 
through the uncertainty of credit and the effects of a depreciated 
and fluctuating currency. It was political strife that brought 
about the removal of these deposits, and not economic reasons. 
The state banks at that time were generally conducted with the 
utmost disregard for not only safe banking methods, but very 

252 



UNITED STATES TREASURY. 253 

frequently the principles of honesty as well. They were so far 
removed from the direct control of the government that the 
finances of the country, when dependent upon them, were left in 
a state of uncertainty and demoralization. To make matters 
worse the treasury department on September 26, 1833, followed 
up the transfer of its deposits by issuing a circular to the deposit 
banks in which occurred the following statement: "The deposits 
of public money will enable you to afford increased facilities to 
commerce, and to extend your accommodations to individuals.^^ 
Acting upon the hint, the banks loaned out the government 
deposits, the era of speculation set in, the state banks inflated 
their currency with greater issues of bank notes, and things ran 
riot until the culmination was reached in the panic of 1837. 
Nearly all the banks failed. They held $32,000,000 of govern- 
ment deposits, a large portion of which was lost. 

It then became apparent that the government must keep its 
money in its own vaults. Two attempts had been made at the 
policy of entrusting them to the state banks (1811-1816 and 
1833-1837) and both had proven disastrous. Van Buren was 
the president. He was the political heir of General Jackson, 
and owed his election largely to the influence of the latter. Ac^ 
cordingly he shared General Jackson's antagonism to a United 
States Bank, and was averse to chartering a third bank, and 
yet there was no means available for the safe keeping of the 
government funds or the establishment of a stable and uniform 
currency except for the government to undertake the matter 
Establishment itsclf . After scvcral ycars of weary dissensions and 
ent^Trlatu^y"^" wrangling iu which the great leaders, Webster, 
System Clav, Calhouu and others, participated, in speeches 

of the power and brilliancy which usually characterized these 
eminent orators, the independent treasury, sometimes called the 
sub-treasury system, was worked out, and in August, 1846, 
became a law. Thus was begun the policy of the independence 
of the government from the banking system of the country. The 



254 HISTORY OF BANKING. 

"divorce of bank and state'' advocated by Jackson and urged 
by Van Buren had become a fact under Polk. Whatever objec- 
tioij there may be to the independent treasury system at the 
present time^ its establishment in 1846 was probably the best 
way out of a difficult and perplexing situation. 

The law begins by defining the treasury as follows: "The 
rooms prepared and provided in the new treasury building, at the 
seat of government, for the use of the Treasurer of the United 
States and his assistants and clerks, and occupied by them, and 
also the fire-proof vaults and safes erected in said rooms for the 
keeping of the public moneys in the possession and under the im- 
mediate control of said treasurer, and such other apartments as 
are provided for in this act as places of deposit of the public 
money, are hereby constituted, and declared to be, the treasury 
of the United States.^' Branches or sub-treasuries were pro- 
vided for in the law, to be established in New York, Phila- 
delphia, Boston, New Orleans, Charleston and St. Louis, each 
under the immediate direction of an assistant treasurer. The 
places selected for the location of sub-treasuries were cities in 
which the government was presumed to have extensive trans- 
actions, either as ports of foreign commerce, or, as in the case 
of St. Louis, a convenient point for the sale of the vast domain 
of government lands. These were the cities in which the 
government deposits had been kept, principally, in the state 
banks. 

The Independent Treasury Act further provided "That the 
treasurer of the United States, the treasurer of the mint of the 
United States, the treasurers and those acting as 
ofTh^AcT ^^^^h of the various branch mints, all collectors of 

the customs, all surveyors of the customs acting 
also as collectors, all assistant treasurers, all receivers of public 
moneys at the several land offices, all postmasters, and all public 
officers of whatsoever character be and they are hereby required 
to keep safely, without loaning, using, depositing in banks, or 



m\ 



INDEPENDENT TREASURY ACT. 255 

exchanging for other funds than as allowed by this act^ all the 
public money collected by them^ or otherwise at any time placed 
in their possession or custody/^ Thus the purpose of the act 
clearly was a complete separation of the government finances 
from the banking system of the country. Even though the sub- 
treasurers and collectors in various parts of the country may 
not at first have been provided with suitable vaults or safes 
for the safe keeping of the public money^ nevertheless they were 
expressly prohibited from depositing in the banks. Taken in 
connection with the law authorizing the emission of treasury 
notes* as currency^ the independent treasury and its branches 
became in effect a gigantic bank. 

One of the most important features of the Independent Treas- 
ury Act was the special clause v>^hich required all payments of 
public dues and also all disbursements to be made in gold or 
silver coin or treasury notes^, and all exchanges of funds to be 
made upon a gold and silver basis. This clause placed the 
country on a specie basis, and kept up a specie circulation which 
gave a sound basis to the whole country. All customs, the pro- 
ceeds of the sale of public lands and other public dues were paid 

in gold, silver or treasury notes, and all disburse- 
Specie Clause mcnts f or Salaries of government' officials, public 

improvements and expenses of the Mexican War 
were paid in the same. The Independent Treasury system had a 
beneficial effect by restraining the issues of state bank currency. 
Considerable difficulty was experienced in transferring funds 
from one depository or sub-treasury to another without the aid 
of the banks, necessitating the movement of the actual money in 
many instances, involving both expense and risk, but a system 
of drafts was adopted that worked well. 



♦Treasury notes were first issued during the years 1812-13-14-15 as a 
means of carrying on the war against England. They were again issued 
during the panic period, 1837-1843, and again during the Mexican War, 
1846-1847. They were usually in denominations of $100, payable to order, 
and bore interest. 



256 HISTORY OF BANKING. 

The Independent Treasury system seemed to meet every re- 
quirement. The Mexican War had been financed successfully by 
the government issuing $20^000,000 of interest-bearing treasury 
notes at par and contracting a $28,000,000 loan, its bonds com- 
manding a premium. Business was good. Foreign commerce 
had increased and the fiscal machinery of the new system 
seemed to do its work with little friction. In his report of 
December, 1856, the Secretary of the Treasury declared "^^that the 
independent treasury, when over trading takes place, gradually 
fills its vaults, withdraws the deposits, and, pressing the banks, 
the merchants and the dealers, exercises that te«iperate and 
timely control which serves to secure the fortunes of individuals 
and preserve the general prosperity.^^ He thus believed that the 
Independent Treasury would act as a check on over trading and 
a balance wheel to our commercial prosperity — a prediction 
which has not been altogether verified by time and experience. 

The great crisis in our history, which occurred in 1861, 
changed the executive officers of the government and placed at 
the helm a class of men who were the political descendants of 
the old Whig party, of which Webster and Clay were leaders. 
Lincoln and Chase were not so particular to maintain the com- 
plete separation of the Treasury from the banking system, and as 
the exigencies of a great war confronted them, they turned at 
once to the banks for loans. Between the panic of 1857 and the 
outbreak of the war the country had been prosper- 
The War Crisis ous, and the bauks had accumulated a strong 
specie reserve, while the expenditures of the gov- 
ernment during this time had exceeded the revenues and left 
the treasury empty, the deficit having been met by bond issues 
amounting to $90,000,000. The government needed gold and 
the banks had large quantities of it. Accordingly Secretary Chase 
in July, 1861, applied to the banks for a loan of $50,000,000. 
This was the first friendly act or overture made to the banks 
since the ^^divorce of bank and state'^ in 1846. It was the first 



TREASURY AND THE BANKS. 257 

step away from the principle on which the Independent Treas- 
ury was founded — the complete separation of the Treasury from 
the banking system of the country. Between August 19 and 
November 19, 1861, Secretary Chase borrowed over $140,000,000 
from the banks. 

Loaning their gold reserve to the government, the banks 
were unable to redeem their notes, and in December, 1861, were 
forced to suspend specie payment. Being sorely pressed for 
funds with which to carry on the war, the government had issued 
large volumes of "greenbacks,^^ which by a legal provision were 
forced upon creditors. Not having a reserve sufficient to support 
Suspension ^^^ paper circulation, on January 6, 1862, the 

of Specie government also suspended specie payments. Thus 

ayments ^^^ "spccic clausc,'^ ouc of the most pronounced 

features of the Independent Treasury Act, was made of no effect. 

Next came the National Banking Act, by which the banking 
system of the country was linked to the Treasury Department, 
to be controlled by it. Banks were made depositories of public 
funds and authorized to act as financial agents of the government 
in receiving subscriptions to government loans and the collection 
of internal revenue taxes. So close was now the relation be- 
tween the banks and the treasury that the law of 1846 had be- 
come practically a dead letter, and the very purposes for which 
Closer Relation the independent treasury system was established — 
Treas^uryand Separation from the banks and the maintenance 
the Banks of specic payments — were both abandoned owing to 

the stress of circumstances. By the same act which formed the 
national banks the state bank currency was driven out of circula- 
tion and the issues of the national bank notes were regulated 
and controlled by the treasury. These banks aided the Treasury 
in placing and carrying the immense loans necessary to maintain 
the armies and fleets in active service for four years. It would 
indeed have been very difficult if not impossible for the govern- 
ment to carry the war through to its close without the aid and 
co-operation of the banks. 



258 HISTORY OF BANKING. 

The close connection between the Treasury and the banks, 
brought about b}^ the exigencies of a great war, have continued 
to the present time, and even grown stronger and more intimate 
as the financial operations of the government have expanded in 
recent years. In 1879 the sub-treasury at New York became a 
member of the bank clearing house. This connection with the 

banks proved to be very important and valuable 
Siifcethe^war ^^ ^^^ government just prior to and during the 

period of the resumption of specie payment, in 
1879, for it relieved the sub-treasury of the necessity of making 
coin payments to any large extent, since the clearing house 
agreed to accept legal tender notes in payment of all balances 
due from the government to the associated banks. Indeed, if 
the Treasury had attempted the resumption of specie payments 
at that time without the aid and co-operation of the banks, it is 
almost certain that the attempt would have proven a failure 
because the banks held the chief supply of gold. Since the 
resumption of specie payments the policy of the government 
with reference to the Treasury has remained practically un- 
changed to the present time. Upon the Treasury depends the 
stability of our entire financial system, and upon this largely 
depends the prosperity of the nation. 

Having now sketched briefly the history of the Independent 
Treasury system, we shall proceed to examine into its character 
and organization. The Treasury is the agency whereby the 
financial operations of the government are carried on. It is the 
means by which a uniform standard of value is given to our 
currency, a system of coinage is maintained, our banking system 

is controlled, and the revenues of the government 
^h!T'^c7suTV^ are collected and disbursed. The Independent 

Treasury consists of the Treasury Department at 
Washington and nine sub-treasuries, located in Baltimore, Bos- 
ton, Chicago, Cincinnati, New Orleans, New York, Philadelphia, 
San Francisco and St. Louis. In addition to these the govern- 



TREASURY RESERVE. 259 

ment has established at various places^ where there are no sub- 
treasuries^ depositories for the receipt and payment of govern- 
ment funds. 

The United States Treasury holds a reserve of $150,000,000 
gold for the purpose of maintaining the credit of the govern- 
ment and establishing confidence in its ability to redeem its 
paper currency in specie on demand. This reserve supports 
obligations equal to nearly ten times its amount, so great is the 
faith of the people in the ability and integrity of the government. 
The outstanding obligations of the government, which rest in 
whole or in part upon this reserve, and are kept on a par with 
gold by it, amounted on December 31, 1902, to $1,375,347,166, 
as follows: 

United States notes (greenbacks) $343,783,541 

National bank notes 371,552,495 

Silver coin (standard silver dollars) 78,700,912 

Silver coin (subsidiary) 93,082,863 

Silver certificates 463,304,840 

Treasury notes of 1900 24,922,515 

]^ot only are all forms of money in the United States main- 
tained upon a uniform gold basis and made interchangeable by 
the redemption system of the government, thus causing $1,375,- 
347,166 in credit money to circulate as the equivalent of gold, but 
the Treasury is constantly redeeming the currency presented to it, 
and issuing new bills instead, thus freeing the paper circulation 
from old and tattered bills. The government also receives de- 
posits of gold coin or bullion and issues certificates against these 
in equal amount. Of these there were outstanding on July 1, 
1901, $247,036,359, representing that amount of gold in the 
vaults of the Treasury. 

The business of the nine sub-treasuries consists in receiving 
deposits from collectors of customs in the ports of entry, in- 
ternal revenue officers, national banks for their annual tax, post- 
masters for account of the post office department, also patent 



260 HISTORY OF BANKING. 

fees, deposits for transfer to other points by banks or other cor- 
porations and individuals. The payments consist of pensions to 
soldiers and their widows, and the warrants or checks of dis- 
bursing officers such as paymasters, quartermasters and others. 
All mutilated currency such as United States notes 
sub-Treasurfe^s ^^ bank bills that havc become unfit for circula- 
tion, are replaced at the sub-treasury free of 
charge. United States notes are redeemed in gold, and one 
kind of money is exchanged for another. Gold certificates are 
issued for deposits of not less than twenty dollars of gold coin. 
Silver certificates are issued for silver dollars, and vice versa. 
Thus the sub-treasury is a money-receiving, money-paying and 
money-exchanging establishment. Its accounts are balanced at 
the close of each day and a summarized statement of the day's 
business is forwarded to Washington. 

Some of our ablest financiers and students of the subject are 
now criticising and condemning the Independent Treasury sys- 
tem, on the ground that it interferes with the normal operation of 
the business interests of the country. The principal objection 
lies in the fact that it locks up in the sub-treasuries large 
volumes of money in the form of customs at certain times or 
seasons, thus contracting the money in circulation, when the 
business interests of the country may require all the circulating 
medium. Prof. David Kinley, in criticising the system, says: 
*^^The action of the Independent Treasury is such as to vary the 
amount of money in circulation. At one time it absorbs, at 
another disburses, considerable sums. There is nothing in the 
nature of the sub-treasury that makes its receipts and payments 
necessarily concomitant with a free and stringent condition of 
the money market respectively. '^ Its action is independent of 
the money market. Were it possible that the Independent Treas- 
ury could absorb and withhold funds when not needed in busi- 
ness channels, and disburse it freely when business interests 
required a larger circulating medium; it would afford elasticity 



THE SUB-TREASURIES. 261 

to the currency and prove a great benefit, but unfortunately it is 
liable to act in exactly the opposite direction, and thus aggravate 
the money stringency. Then the Secretary of the Treasury must 
needs go outside of the law and use his prerogatives to assist 
the financial interests of the country by the purchase of bonds 
so as to release some portion of the money in the Treasury for 
general circulation and use. 

By withholding money from circulation as the Treasury 
does at times, the effect is to lower prices of commodities gen- 
erally, and at other times large disbursements by the Treasury 
tend to raise prices by making money more plentiful, thus in both 
instances unsettling values, to a slight extent. The remedy 
advocated is to abolish the sub-treasuries and deposit the govern- 
ment funds with the national banks, where it can be used in the 
channels of trade and commerce. 



BANK CLEARING HOUSE. 



CHAPTER XXVII. 

SETTLEMENTS BETWEEN BANKS. 
HISTORY; OBJECT; METHODS; CLEARING HOUSE CERTIFICATES. 

The original idea of a clearing house was an institution de- 
signed to facilitate the settlement of daily balances due to and 
from a number of banks. It is thus a labor saving device^ 
arising from the payment of checks on each other, and the 
transaction of other business. It would be almost, if not quite, 
impossible to transact the volume of business 
Object which daily passes through our banks were it not 

for this ingenious institution. In the New York 
clearing nouse alone the daily clearings frequently run above 
$300,000,000, and this vast volume of business is settled by the 
payment of about five per cent, of actual money as balances. 
The scheme of the clearing house is merely to offset one debit 
against another credit. Were there but one bank in New York, 
no clearing house would be necessary, since the debits and 
credits would be offset against each other on the books of the 
bank and one indebtedness would cancel another, to a large 
extent, but where there are numerous banks and vast numbers 
of checks to be settled, the clearing house effects an enormous 
saving by bringing them together. The clearing house with its 
gigantic operations cancels obligations arising between banks, 
the same as the banks do for the individuals composing a busi- 
ness community. 

The use of checks and drafts in the transaction of business 
has grown in this country to a very wide limit, much in excess 

262 



USE OF SUBSTITUTES FOR MONEY. 



263 



of their use in any other country, and as the United States 
becomes older and better banking facilities are provided, people 
are gradually educated to the use of commercial 
Use of Checks paper, and the volume of actual money— coin 
and Drafts ^^ ^^^^^ currency— as compared to the volume of 

business transacted, grows proportionately less. The increase 
in the use of checks and drafts has more than kept pace with 
the increase in the volume of business of the country, hence the 
volume of actual cash in circulation has grown proportionately 
smaller. Again the proportion of checks and drafts to money 
is less in the parts of the country distant from the money centers 
and in small towns where banks are scarce. Such commumties 
need more money in proportion to the volume of business done, 
and must have the ready cash in hand to cover the numerous 
small transactions occurring. But in the large cities and great 
money centers of the country substitutes for money m the form 
of commercial paper are more extensively used, and the transfer 
of credits upon the books of the banks constitutes the method 
of payment in a large proportion of instances. The clearing 
house encourages and facilitates the use of substitutes for money 
by furnishing a safer and more convenient method for settling 
exchanges between banks. 

The first clearing house was organized in London about 1775, 
and for three-quarters of a century it and the one established 
in Edinbur<?h soon after remained the only organizations of the 
kind. Prior to the establishment of the London clearing house 
the Bank of England served as a means of making settlements, 
and besides the people were not accustomed to the use of bank 
checks in making payments, as at the present time. The New 
York clearing house was established in 1853, Bos- 
History ton in 1856, Philadelphia in 1858, and Chicago in 
1865. The clearing house is therefore a com- 
paratively recent institution. Every considerable city where 
banks are numerous now has its clearing house, and the total 



264 BANK CLEARING HOUSE. 

annual clearings of the United States mount up to fabulous 
figures. 

A room of suitable size to accommodate the volume of busi- 
ness, quiet and centrally located, is the first consideration. The 
furniture consists usually of a counter or desks over which the 
settlements are to be made. Each bank, member 
ciea^ing° ^^ ^^^ associatiou, sends to the clearing room at 

the precise hour appointed two clerks, one of whom 
holds the exchanges of the previous day, including also items 
received in the morning's mail. These are all listed and those i 
against each bank kept separate. At the tap of the manager's 
bell a clerk from each bank takes his position behind the coun- 
ter and opposite him his companion from the same bank. A 
given signal and all of the clerks outside the counter move for- 
ward to a point opposite the next clerk, pass the exchanges be- 
longing to the bank represented by that clerk over the counter, 
take a receipt for them, and then with a concerted movement 
all pass to the next. When the clerks on the outer side of the 
counter have made their rounds and delivered their exchanges 
they return to their several banks, carrying with them the checks 
received from other banks, while the settling clerks remain to 
cast up the columns and ascertain whether their several banks 
are debtor or creditor, whether they are to receive or must pay 
a balance into the clearing house. As each clerk completes his 
calculations he reports the result to the manager, and when all 
have finished, and the totals agree, the clerks are dismissed. 

The total of the debits against the debtor banks must equal 
the total of the credits in favor of the creditor banks, on the 
theory that every debit has a corresponding credit. A bank 
cannot know until its settling clerk returns whether it has a 
balance in its favor or is owing the clearing house and how much. 
It may be a creditor one day and a debtor the next. Its officials 
naturally hope for a favorable balance, for that indicates a 
temporary increase in its line of deposits. But if the balance is 



CLEARING HOUSE BALANCES. 265 

against the bank it must be prepared to meet it promptly at the 
appointed hour. The payment of balances by the debtor banks 
takes place at perhaps an hour after the exchanges 
Balances"* °^ havc been made^ a receipt being taken in every 
case in the regular way. Messengers from the 
creditor banks call later to receive the balances due their banks. 
The kind of money used in the payment of these balances is 
regulated by the rules of the associations^, but is usually gold 
coin and currency. Silver is permitted in restricted quantities 
in some associations, but owing to its bulk it is not well suited 
to large payments. The rules of some associations require 
the money paid in to be assorted and put up in packages of 
$5^000, on which is marked the number of the bank, as a guar- 
antee of the correctness of the count. 

The management of a clearing house association is usually 
vested in a board of officers consisting of a president, vice presi- 
dent, secretary, treasurer, manager and a clearing house commit- 
tee. In small cities this list of officers is sometimes curtailed 
by omitting the office of vice president and secretary and com- 
bining the duties of the latter with those of manager. The 
duties of the officers are such as usually appertain 
Management to similar officcs in Corporations, with the excep- 
tion of the manager, who has charge of the clear- 
ings and is the principal executive officer of the association. 
The clearing house committee is usually composed of three of 
the most capable bankers in the association, elected annually by 
the members. This committee has almost absolute authority, 
being in effect a board of directors. It decides upon the admis- 
sion of new members, suspension of members when expedient, 
makes rules for the management of the association, and in gen- 
eral directs its business. 

While the first and primary object of a clearing house is 
the settlement of exchanges between banks, its functions are not 
confined to this. By association many benefits have been derived 



266 BANK CLEARING HOUSE. 

by the banks not contemplated in the original intent^ and the 
tendency has been, in recent years, to include in the scope of the 
clearing houses many questions of policy and prac- 
Functions tice affecting the banks and the business com- 

munity. The most important functions of 
the clearing house, beyond that of effecting exchanges, is summed 
up by Cannon in his ^^Clearinghouses,^^ as follows: "1. The 
extending of loans to the government. 2. Mutual assistance of 
members. 3. Fixing uniform rates on deposits. 4. Fixing uni- 
form rates of exchange and of charges on collections. 5. The 
issue of clearing house loan certificates.^^ In case a member is 
found to be in financial straits owing to a panic or false rumor, 
causing a run of depositors, and is unable to convert its assets 
into cash with sufficient rapidity to meet its demands, the clear- 
ing house committee will examine into its condition, and if its 
assets are found to be ample and good, and its management not 
seriously defective, it will extend temporary aid until the strain 
is relaxed. If the member, however, is addicted to objectionable 
methods in management the committee will not go far out of its 
way to lend saving help, preferring to get rid in this way of a 
weak and ill managed member. 

By fixing the rates of interest on deposits, rates for collection 
and exchange, etc., the committee takes away the incentive of 
banks to compete against each other in these particulars — a 
practice which might lead to improper and unsafe banking. 
Bate cutting is especially objectionable in the banking business. 
But probably the most important function exercised by the 
clearing house is the issuance of loan certificates. These are 
given for temporary loans, usually consisting of good assets, made 
by members to the association and are receivable 
clrtmcat^s°"^^ for balances due to other members. The first cer- 
tificates were issued by the New York clearing 
house at the opening of the Civil War, and were necessitated 
by the general decline and shrinkage in bank deposits and loans 



CLEARING HOUSE CERTIFICATES. 267 

consequent upon the uncertainty attending the election of 
Lincoln to the presidency. The New York clearing house met 
and passed the following resolution: 

"In order to enable the banks of the city of New York to 
expand their loans and discounts^ and also for the purpose of 
facilitating the settlement of exchanges between banks, it is 
proposed that any bank in the Clearing House Association may, 
at its option, deposit with a committee of five persons — to be 
appointed for that purpose — an amount of its bills receivable, 
United States stocks, treasury notes or stocks of the State of 
New York, to be approved by said committee, who shall be 
authorized to issue thereon to the said depositing bank certifi- 
cates of deposit bearing interest at seven per cent, per annum, 
in denominations of $5,000 and $10,000 each as may be desired, 
to an amount equal to seventy-five per cent, of such deposits. 
These certificates may be used in the settlement of balances at 
the clearing house for a period of thirty days from the date 
thereof, and they shall be received by creditor banks during that 
period, daily, in the same proportion as they bear to the aggre- 
gate amount of the debtor balances paid at the clearing house. 
The interest which may accrue upon these certificates shall, at 
the expiration of thirty days, be apportioned among the banks 
which shall have held them during the time.^^ 

Several times during the Civil War the New York clearing 
house resorted to the use of certificates as a means of relieving 
the financial stringency, and the effect in each case was decidedly 
beneficial. Banks were thus enabled to discount commercial 
paper and make loans to relieve business firms which were per- 
fectly safe and solvent, but in distress, and the business situation 
at once felt the brightening effects of the policy. Clearing house 
certificates to the extent of $22,000,000 were in circulation among 
the banks of New York in 1862, and this was equivalent to a vast 
increase in the volume of money in circulation. Again during 
the panic of 1873 the same course was pursued and about $26,- 



268 BANK CLEARING HOUSE. 

000^000 in certificates were issued by the New York clearing 
house. Other cities seeing the benefits of the system, adopted 
it, and issued certificates for temporary relief, thus greatly reliev- 
ing the severity of the memorable panic of 1873, which extended 
over the entire country and resulted in severe hardships. 

In 1893 a panic of unusual severity spread over the United 
States. Banks were forced to close and business houses were 
pushed to the wall. Under the restrictions of the national bank- 
ing law it was impossible to secure relief by an increase in national 
bank notes in time to save the people from the dis- 
Panic of 1893 astcrs which follow in the wake of a financial storm. 
Banks in the small cities and towns drew heavily 
against their deposits in the large cities and money centers, 
especially New York, and it became necessary for the financial 
institutions, chiefly in New York, to find a means of staying 
the force of the panic. The most potent factor in this relief 
was the clearing house certificates issued by the associations of 
New York and other cities. Forty-one million dollars of these 
certificates were issued by the clearing house committee, based 
upon the deposits of securities by various banks of New York. I 
Other cities pursued the same plan, and the amount of bank 
money was thereby suddenly increased throughout the country 
to the extent of perhaps $150,000,000, greatly to the relief of 
business interests generally. * 

What is and what is not proper matter for clearing depends ' 
upon the rules of each particular association, and these are by 
no means uniform on this point. The following paragraph ap- 
pears in the rules of a western clearing house: ^Troper matter 
for clearing shall consist of checks, drafts, manager's certifi- 
cates, certificates of deposit, either demand or ma- 
cielring°^ tured, and any other matter specially agreed upon, 

until notice is given to the contrary, and any bank ; 
clearing paper not proper shall be fined.'^ In some associations h 
notes and drafts are not sent through the clearings, while 



f 



MATTER FOR CLEARING. 269 

in others they may be cleared. The general rule seems to be 
that only such items as upon their face are unconditional de- 
mands upon a bank, for payment, are proper material for clear- 
ing. Some associations keep near this rule, while others seem to 
broaden it to the full limit of expediency. 

The clearing house associations in a number of the large 
cities have enacted rules forbidding matter to be cleared which 
bears a restrictive endorsement. It was formerly the custom 
for depositors to endorse "For Deposit/^ "For Account of/' "For 
Collection/'^ etc., above the name of the depositor. 
Endorsements ^^^^^ intending to transfer possession but not title 
to the paper. This is now forbidden, as a measure 
of self-protection, by many large associations, unless the clear- 
ing bank specially guarantees the paper. Paper then to pass 
through the clearing house should be endorsed either in blank 
or full, as "Pay or order.^^ Before sending its ex- 
changes to the clearing house, each bank stamps a receipt upon 
the back of each item, with its number, and the words, "Ke- 

ceived payment through the clearing house.'' or 

otherwise, as the rules of the association prescribe. This in- 
dorsement though made unofficially and by means of a rubber 
stamp, is regarded as authentic, and guarantees all previous 
indorsements After the clearings are made, items which are not 
honored by the bank on which they are drawn are returned by 
messenger and "bought back'' by the bank through which they 
were cleared. 

Banks and trust companies not members of the clearing house 
association may clear through a member-bank, but the latter is 
liable to the association for such exchanges the same as for its 
own, and they usually exact proper security as well as compensa- 
tion from the bank or trust company for performing the service. 
In Boston the clearing house association has put in operation a 
system for collecting checks on out-of-town banks which is 
certainly a material saving in expense as well as labor. Instead 



270 BANK CLEARING HOUSE. 

of each bank collecting its out-of-town checks^ these are all sent 
to the clearing house at a fixed hour daily and there assorted by 
towns and banks. All of the checks on each country bank are 
Non-members ^^^^ listed and forwardcd to that bank in one 
and Country package. TMs is a decided advantage also to the 
^^^^^^ country bank^ since payment can be made to the 

Boston clearing house for all of these checks at one time^ in- 
stead of having to remit to several different banks. The remit- 
tances are then put through the regular clearings by the 
manager of the clearing house very much the same as other 
items. 

No doubt the clearing house, which was originally intended 
merely as a labor and time saving device, and which has since 
developed into an important factor in our financial system, 
assuming new functions from time to time, will further expand 
and add to the efficiency of the financial machinery of our 
country. In his valuable treatise on clearing houses, Mr. James 
G. Cannon, president of the Fourth National Bank of New 
York, says: "^^Clearing houses are gradually becoming a welding 
force that ultimately will bring to the banking business of this 
country the centralization which it so greatly needs. In the 
Clearing- coursc of time ratcs for money in the United States 

houses of the will bccomc more and more on a par with those 
prevailing in European money centers, and then 
the clearing houses of the various financial centers of this country 
will 'be obliged to undertake functions which as yet they have 
only discussed.^^ 



BORROWING AND LENDING MONEY. 



CHAPTEK XXVIII. 

THE USE OF CREDIT. 

THE MONEY MARKET; CALL LOANS; COLLATERALS; 
NOTE BROKERS. 

Business men must borrow money. With rare exceptions 
every firm and corporation in the regular course of business 
must at times resort to the money lender. Credit lies at the 
foundation of our financial and commercial systems, and it is 
prudent business policy to use credit within proper limits. When 
a firm can earn more than the ruling rate of interest upon capital 
employed, after safely making allowance for all expenses and 
hazards, it may prudently use borrowed money as a part of its 
working capital. Suppose a firm with $100,000 capital turns its 
capital over six times a year and makes a net profit of 2J per 
cent, each time. Its yearly profits then would be $15,000. If 
now it can extend its business in the same proportion it can 
afford to borrow, say $50,000 at 6 per cent, interest to increase 
its working capital. Its profits would then amount to $22,500, 
from Avhich deduct $3,000 interest, and we have a net profit of 
$19,500, or nearly 20 per cent, upon the capital of the firm. 

The constant general tendency of prices of merchandise is 
downward. Competition tends to reduce prices and lessen profits. 
To offset these diminishing profits, firms aim to 
Borrow?ng^°*^ do a larger volume of business and make the ex- 
pense proportionately less. This requires greater 
capital to introduce improved machinery, put more sales- 
men on the road, or otherwise improve the facilities of the house, 

371 



272 BORROWING AND LENDING MONEY. 

and acts as an incentive to the firm to resort to the money 
lender. 

As a country grows older and the surplus earnings of the 
people are carried over from year to year, there is an in- 
creased amount of money seeking borrowers, and competition 
of money against money tends to reduce the rate of interest, thus 
enabling borrowers to meet the falling market prices of their 
wares and yet pay the ruling rate of interest for borrowed 
capital. The machinery for massing capital, such as the savings 

banks which gather up the little rivulets of wealth, 
Lenders trust companies, insurance companies and banks, 

becomes more numerous and efficient and the 
knowledge of the conditions of financial safety in business, such 
as reports on the credit of firms and corporations, also becomes 
more thorough and reliable, so that the whole process of borrow- 
ing and lending in business is facilitated and made less hazardous. 
To take advantage of these trade forces and use them properly 
is the province of the financier. 

The inexorable law of supply and demand obtains in the 
money market the same as in other things. Money is a com- 
modity, and at times it is in greater demand than at others, the 
same as other commodities. Supply and demand, as they affect 
the money centers, affect the entire money market to a greater 
or less degree. Thus a ^Hightness'^ of money in Wall Street, 
or an unusual demand for money there, causes a rise in the rate 
of interest, and money at once flows to New York, perhaps 

causing a rise in the rate of interest through the 
Market*"^^ couutry. In the agricultural districts of the West, 

when the great crops of corn and wheat must be 
carried to market in the autumn, a large amount of money is 
needed, and the banks aim to so time their loans as to have a 
good supply on hand at that time. In the sugar and cotton 
districts of the South the crops are ready for market in December 
and January, and these make a profitable demand for money. 



Ml 



THE MONEY MARKET. 273 

In the states where wool is extensively raised, the time of the 
wool clip in the spring brings need for an increased volume of 
money, and thus the law of demand and supply affects the money 
market and regulates the rate of interest, the same as it affects 
other commodities. 

The largest borrowers of money are the great corporations 
and syndicates which aim to secure in this way a portion of the 
capital which they require at a low rate of interest and use it at 
a profit to themselves. Instead of issuing commercial paper, as 
in the case of firms, their borrowings are evidenced by bonds 
secured by a mortgage upon the property of the company. 
These bonds are sold to the public generally in large or small 
quantities. A company earning six per cent, on its stock could 
sell bonds to the amount of half its capital on a 
basis of five per cent, interest, and thus on the same earn- 
ings, pay seven per cent, dividends on its capital stock. This 
is a legitimate proceeding and affords a gain which the officers 
of any corporation may rightfully take advantage 
Corporations of. While the bouds of large corporations are sold 
to the public generally, those of small corporations 
seldom reach the public. Such companies borrow from 
the banks chiefly, like firms and individuals, and owing to the 
limited liability of the stockholders for the debts of the company, 
the banks frequently require in addition to the obligation of the 
corporation a personal guaranty from the officers. This gives the 
bank a claim not only against the assets of the company in case 
the loan is not paid, but also against the officers personally. 

The precise limit up to which a corporation or firm may 
properly borrow is hard to define. It is very close to that point 
at which its paper fioats at par drawing ordinary 
BoTrowLg interest. When a concern must sell its paper at a 

heavy discount, it is evidence that it is over bor- 
rowing. In order to hold its bonds at par companies sometimes 
offer a higher rate of interest than the usual rate. But this is a 



274 BORROWING AND LENDING MONEY. 

public confession of the weakness of the paper. Occasionally 
a corporation will issue bonds bearing a low rate of interest and 
sell them below par. This is questionable financiering^ since the 
face value of the bonds must be paid at maturity. Thus a 
corporation desiring to raise $1^000^000 issues bonds bearing 
4 per cent, and sells them at 80. In order to realize the amount 
of cash needed, viz., $1,000,000, it must issue $1,250,000 of 
bonds, and at maturity these must be paid. This is equivalent 
to paying a bonus of $250,000 on the sale of its bonds. It is an 
example of that human tendency to postpone troubles, or re- 
lieve the present by borrowing from the future. We may 
therefore conclude that to issue bonds or other obligations at 
too high a rate of interest, or sell them at a discount, is a viola- 
tion of the rules of good financiering and indicates over borrow- 
ing. With individuals or firms it may be said that a concern 
should not, under ordinary conditions, borrow more than half its 
net worth. 

The great money lenders are, of course, the banks. Borrow- 
ers are a necessity to a bank, and it will loan to responsible 
borrowers to any reasonable and proper limit. Bank loans are 
made chiefly by discounting paper for depositors. Notes and 
acceptances running ninety days or less, given for the sale of 
merchandise, and hence representing the value of goods or othei? 
property bought or sold, is a desirable class of paper for discount. 
The value is behind such paper, and it may be said to represent 
the property. A customer of a bank need not hesitate to offer 
for discount any paper of this class which is, in his opinion, 
Desirable S^^^y ^^^ ^'^ ^^c othcr hand he should not be 

Paper for offcndcd if his banker refuses to discount the 

Bank Discount ',^ j • • rrn i i 

paper, even without givmg reasons. The banker 
may be in possession of information concerning the other parties 
to the paper which the holder is not, and yet cannot disclose that 
information. Every customer of a bank who keeps an account 
of any consequence is considered as entitled to a "line of dis- 



BANK LOANS. 275 

coimt^' in proportion to his usual balance in the bank and finan- 
cial standing in general. The limit of this ^^line'^ is agreed upon 
with the bank officials from time to time, and the customer sends 
in for discount such notes and drafts as he may have which he 
regards as good up to the limit of his "line.^^ 

Banks aim to have diversified borrowers. By this is meant 
those in various lines of business, whose needs come at different 
times of the year. If the bank had all one class of borrowers 
they would all want their money at the same time; also at that 
time draw down their deposits, and the bank would find itself 
without the necessary funds to advance. In order that the bank 
may at all times be ready to meet the demands of its customers, 
it aims to have a volume of money loaned to persons having 

no ^^ine of credit^ ^ and whom the bank can ask 
Call Loans to retire their indebtedness on short notice. In 

large cities some banks have from 25 to 50 per 
cent, of their loans made to borrowers who do not deposit with 
the bank, and to whom the bank is under no obligations to 
extend the loan for any definite period of time. Such loans are 
made to stock brokers, and are usually payable on demand. 

If a business man borrows of a bank a sum of money on his 
note, and gives as security a pledge in the form of other notes, 
shares of stocks or bonds, such pledge is called ^^collateral.^^ The 
collateral does not become the property of the bank, and the 
bank is responsible for its safe keeping and return to the owner. 
Loans on collateral are usually evidenced by notes in which a 
clause is inserted giving the bank the right, in case there is 

default in the payment of the note, to sell the 
CoUaterai Collateral and apply the proceeds of such sale to 

the liquidation of the note, the residue, if any, to 
be returned to the owner or debtor. The trend of the times is 
for banks to loan on collaterals and less on the individual notes of 
borrowers, but there are cases where collaterals cannot be readily 
furnished. The merchant has a stock of goods upon his shelves 



276 BORROWING AND LENDING MONEY. 

but this cannot be placed in the vaults of banks, like stocks or 
bonds. But merchants and others who borrow on individual 
notes are required from time to time to furnish their banks 
with statements of their financial condition, drawn from their 
books. The experienced banker is not only able to read and 
interpret this statement, but reads between the lines the future 
of the business, and advances credit accordingly. In case interest 
coupons attached to collaterals mature while in possession of the 
bank the owner is usually allowed to collect or cash them. 
Collaterals as security depend upon their character. The highest 
quality of collaterals is United States bonds, and from this 
their value descends to almost nothing. Banks aim to leave 
a liberal margin below the market value of any collateral, so as to 
realize the amount of their loan in case of forced sale. Many 
classes of collaterals are shifting in value and of varying degrees 
of security. The banks will exercise care to see that the party is 
not borrowing too much, and that the bank is not getting a large 
part of its assets tied up in one class of securities. 

It is a good rule that all firms should be out of debt at least 
once a year, and better, twice yearly; otherwise the banker, 
through his loans, supplies in fact a part of the capital to the 
concern, becoming a silent partner with no share in the profits, 
and every chance to make a loss. This does not apply to stock 
brokers, who borrow entirely on collaterals, and who use their 
money to carry their customers. They are constantly in the 
market for loans, which they secure for their patrons, enabling 
Loans for them to buy and sell various stocks and bonds 

Speculative in which they expect to realize a profit. Oc- 

Purposes casioually in New York, Chicago and other large 

cities speculation runs very high, and many men having good 
business become interested in the stock market, and unbeknown 
to their bankers and friends carry stocks on a margin with 
some broker, who is perchance borrowing the money for him at 
the broker's bank. Such practices on the part of business meii, 



DOCUMENTARY BILLS. 277 

if discovered, will seriously injure their credit, and bankers are 
ever on the alert to discover a customer who is speculating, and 
to discountenance the operation. 

When property is on its way to market with a certainty or 
probability of early sale, it is a legitimate object on which banks 
loan as collateral. In fact one of the chief functions of a bank 
is to bridge over the period of time between production and 
consumption. When merchandise is shipped for sale either in 
the home or foreign market, bills of exchange are drawn upon the 
consignee, and if accompanied by a specific pledge of the prop- 
erty in the form of a bill of lading, are called 



Documentary 
Bills 



^^documentary bills.^^ A very large part of the 

grain, live stock and cotton of the country is car- 
ried to market in this manner. The property is protected by 
insurance in favor of ^Vhom it may concern,^^ and the bank, by 
holding possession of the documents, holds title to the property 
until the draft is paid. 

Another form of collateral used extensively in business as 
security for bank loans is warehouse receipts. Produce or other 
property may be withheld from market for a better price, and 
while being so held it is placed in a warehouse and the regular 
form of warehouse receipt taken for it. This receipt then may be 

used as collateral to a note for discount at bank. 
Receipts"^^ It represents the property and carries constructive 

possession of the property with it. No one can 
withdraw the produce or other property from the warehouse 
without showing the receipt properly endorsed. Loans on this 
class of collaterals are not, however, regarded with much favor 
by banks, since the time which the property is to be held in store 
is indefinite, and the market value is uncertain, making the 
loan indefinite as to time of payment, and the security liable to 
fluctuation. Loans of this character are accommodation loans 
and often have to be inconveniently prolonged. 

Accommodation paper consists of notes or drafts made or 



278 BORROWING AND LENDING MONEY. 

signed for the express purpose of securing a loan, and do not 
represent a bona fide business transaction. Sometimes the ac- 
commodation consists only of an endorsement upon a note or 

draft created by the person who desires the accom- 
^l^p^er^' modation; it may consist of the acceptance of a 

draft. But whatever form accommodation paper 
may assume, banks and money lenders do not regard it favorably. 
It is not regarded as legitimate business paper like the draft or 
note executed on the basis of a sale of goods. Accommodation 
paper can be collected legally, for the law protects the bank or 
any other innocent third party who takes the paper in the 
ordinary course of business, without knowing its want of con- 
sideration between the original parties, and the obligator to 
such paper must pay. This protection of third parties to com- 
mercial paper is a necessary safeguard to enable it to be readily 
sold and transferred. Accommodation notes and accommodation 
endorsements are not as common in this generation as in the 
past. Many an old man plods along to-day, poor, but wiser for I 
his experience in endorsing paper for a friend, perhaps many J 
years ago. That one fatal act reduced him to penury, from which ] 
he was never able to recover. Business men of to-day have | 
learned to conduct transactions upon safer and better methods, < 
perhaps owing to the experience and good advice of their fathers. | 
A class of dealers in commercial paper called note brokers | 
handle considerable paper of merchants and manufacturers, and ;« 
re-discount with the banks. The note broker is a convenience 
to both the merchant and bank — to the former by buying his 
paper and thus furnishing him with funds which he may need h 
in his business — to the bank by selling paper to it whereby it is > 

enabled to employ its capital profitably when there 
Note Brokers is a lack of applications for discounts from its ^ 

regular customers. Merchants can afford to sell 
their paper at 6 per cent, interest to a note broker, and discount 
their own bills at 1 per cent, per month, or better. The question 




NOTE BROKERS. 279 

arises at once, why does not the merchant sell his paper to his 
bank directly, instead of selling it in the ^"^street/^ and will not 
his banker grant the merchant all the credit he is really entitled 
to, and discount all of the paper his capital and financial standing 
will justify him in uttering? It may not. The bank may have 
its funds loaned out up to the limit and be practically unable 
to buy the merchant's paper, even if desirable, while some other 
bank might be short of good paper. The note broker, as a sort 
of go-between, can sell the paper wherever there is a demand for 
it. He may sell it in another town or city where there is a sur- 
plus of deposits and a dearth of loans. In some localities the 
banking capital is much larger than can be profitably employed 
in the immediate vicinity, and consequently those banks invest 
large sums through note brokers. 

Then again a bank may contract its loans at any time by 
selling notes previously purchased from a note broker. Such 
notes are usually made payable to the order of the firm or indi- 
vidual signing them and then endorsed in blank. To sell this 
paper does not require the bank's endorsement, and it can be 
sold again through the same class of brokers as purchased from. 
When a bank makes a loan to one of its depositors, the note is 
usually made payable to the order of the bank, and it is not 
customary, except in cases of great need on the part of the bank, 
to have this paper go out of its possession. Business men who 
borrow of a bank do not ordinarily wish the bank to let the 
paper go out of its possession. 

The making and selling of one's paper in the market, outside 
of one's bank, and free from the wholesome restraint which a 
bank exercises upon the inclination of a class of depositors to 
borrow beyond their proper limit, is a method of business which 
is fraught with danger and liable to abuses. In 
the^System prospcrous times it is apt to lead to over trading 

or to speculation. Funds obtained in this way can 
be used for any purpose, and are often applied to other uses 
than the discounting of merchandise bills. 



280 BORROWING AND LENDING MONEY. 

As a rule note brokers merely transfer the paper without 
guaranteeing its payment by endorsement. While the broker is 
not legally liable in case the maker fails to pay, yet his business 
success depends upon the manner in which the notes are paid, 
and he is, therefore, exceedingly anxious that they should be 
paid promptly at maturity. He is considered a guarantor that 
Responsibility ^^^ uotcs are all right in every respect, except as 
of the to whether they will be paid or not, and of that the 

bank or buyer is presumed to be equally capable 
of judging. The note broker must make no misrepresentations 
in order to sell his paper. His dealings with the buyer of his 
paper require the utmost good faith on his part. He sends a 
printed list containing a description of perhaps a hundred notes 
to the bank. Each note is numbered and if the bank wishes to 
see any of the paper, it is sent upon application. Or a broker 
or an agent for him may visit a bank personally and exhibit a list 
of the notes and acceptances which he wishes to negotiate. 

Loans on real estate security are considered a desirable class, 
where the intention is to put out the money for a long time. 
The lender usually does not aim to loan a larger amount than 
one-half or two-thirds the value of the property, leaving a good 
margin as an inducement to the debtor to repay the loan, rather 
than default. Loans on real estate are evidenced by a special 
form of note, and secured by either a mortgage or trust deed. 
A mortgage is a conveyance of the property to the creditor with 
the condition that if the debt is paid the conveyance becomes 
void. It is similar in many respects to a deed. 
Loans ^ ^ ^ with a Conditional clause. A trust deed is a con- 

veyance of the property to some third party called 
a trustee in trust as security for the debt. When the debt is paid, 
the trustee executes a release of the conveyance; that is, deeds 
the property back to the owner. Before loaning money on real 
estate security, the lender must satisfy himself not only as to the 
value of the property and its desirability as security for the pro- 



REAL ESTATE LOANS. 281 

posed loan, but he should have the title examined by a competent 
attorney. An abstract of title containing a history of the con- 
veyances through which the title has passed will be furnished 
by an abstract company.* Having found the title clear and 
satisfactory and no judgment against the mortgagor, the mort- 
gage or trust deed may be executed and the loan made, but no 
time must be lost in getting the mortgage on record in the office 
of the recorder of deeds of the county where the property is 
situated. t The object of recording is to give notice of the ex- 
istence of the mortgage to any one who might wish to purchase 
the property or take a mortgage upon it. There may be several 
mortgages on the same property, the first being entitled to prior- 
ity of payment, then the second, and so on. In case the debt is 
not paid at maturity the holder of the mortgage has a right to 
foreclose and have the property sold at judicial sale, the residue, 
if any, after paying the debt, interest and costs, to be returned 
to the mortgagor. After sale, the mortgagor has a period in 
which he is allowed to redeem the property (usually about fifteen 
months) by paying up the debt and all costs, etc., but failing in 
this the sale becomes absolute. As to the special provisions of 
the law in regard to mortgages or trust deeds, their foreclosure, 
etc., the statutes of the state should be consulted. In case 
the security for a loan consists of both land and buildings it is 
usual for the mortgagor to have the latter insured for the benefit 
of the mortgagee. 



♦We now have title guaranty companies who guarantee or insure the 
mortgagee against loss by any defect of title in the property. They are a 
species of insurance company, and their guaranty policies are extensively 
accepted. 

tThe best method is to execute the mortgage or trust deed and place it 
upon record before the abstract of title is brought down to date. Then when 
the abstract is continued it will contain the mortgage or trust deed and 
show the continuity of title up to the moment of the loan. 



CORPORATIONS. 



CHAPTEE XXIX. 

CHARACTER OF CORPORATIONS. 

FORMATION; PROMOTION; KINDS OP STOCK; WATERING STOCK; 

DIVIDENDS. 

A corporation is an artificial person created by law. It is a 
personage entirely distinct from the individuals who form it or 
conduct its affairs. Its members may all die and be succeeded 
by others, but its existence is not affected thereby. It continues 
on indefinitely or until its charter expires, or is forfeited or 
surrendered. Corporations are of two kinds, public and private. 
Public corporations are such as are created for public purposes, 
viz., cities, towns, libraries, hospitals, etc. Private corporations 
are such as are conducted for private purposes and for the benefit 
of those directly connected therewith, as railroad, bank, insur- 
ance, manufacturing and mel-cantile corporations. 
Definition In the casc of public corporations every citizen is 

a member of the corporation. In the case of 
private corporations only those are members who own shares 
of stock. A close corporation is one with a limited membership, 
no stock for sale to the public and vacancies filled by selection, 
the prime object being to keep the profits of the company within 
a small circle or family and immediate connections. Many of 
the most profitable business corporations are conducted in 
this way. 

One of the primary reasons why a corporation, rather than a 
co-partnership, is preferred by those intending to embark in an 
enterprise is that when the capital stock is paid for by the 

282 



FORMATION OF CORPORATIONS. 28B 

stockholders there is no further individual liability for debts 
and obligations of the corporation, and in case of insolvency and 
failure of the corporation, their loss is but the amount they 
have already invested when they subscribe to their shares of 
stock. If the stock is not fully paid up, the stockholder is 
liable to creditors and the corporation for the unpaid balance, 
while in a co-partnership business, conducted by individuals, each 
individual is personally liable for the entire obligations of the 
co-partnership of which he is a member. 

Another reason for preferring a corporation to a co-partner- 
ship is the facility it affords for procuring investments by the 
public, who, by reason of the segregation of the entire capital 
into numerous small shares, are enabled to make an investment 
of such amount as the individuals desire. This method enables 
organizers and promoters to enlist in their enterprises the capital 
of a multitude of investors, large and small, which they would 
be unable to interest without such form of organization. 

Corporations are creatures of the state, and are formed 
either by special charter or compliance with the requirements of 
a general statute. At the beginning of the century all corpora- 
tions in this country were formed by special char- 
Promotion ^^^^ ^^^^ owiug to the corruptiou and bribery re- 

sorted to in order to get charters passed through 
the legislatures of the several states, containing favorable terms 
and granting valuable privileges and monopolies, the constitu- 
tions of most all of our states have been amended so as to 
prohibit the legislatures from granting special charters. Many 
corporations are formed for the purpose of conducting an or- 
dinary business in competition with other houses, as banks, 
railroads, etc., or for buying out or ^%king over^' established 
concerns, while others are formed especially to develop or pro- 
mote a particular franchise, invention or discovery. In the 
latter case the value of the shares is largely fictitious, being 
based upon the estimated future profits of the company. A 



284 CORPORATIONS. 

large portion of the capital stock goes to the inventor or dis- 
coverer or promoter of the enterprise^ as payment for his 
services, and the rest is sold to the publiC;, usually at a very low- 
price at first, and an increasing price as fast as the stock will 
sell. It is in the formation and promotion of corporations that 
serious evils and abuses have grown up in this country. Fraudu- 
lent prospectuses are issued by skillful "promoters" versed in all f 
the arts by which stock is sold, representing that the enterprise \ 
is fully afloat and the stock paid up, when in fact it has been I 
"paid up'^ only by worthless patents, or property purchased | 
at a gross over-valuation. The number of "bubbles'^ which are I 
floated every year, and in which the inexperienced and unwary 
lose their savings, is astounding. In England this evil became 
so great that in 1867 a law was passed requiring a public registry 
of all contracts whereby stock was issued by a corporation in pay- 
ment for any franchise or other property. Investigators claim 
that over speculation is largely due to the formation of corpora- 
tions that have no real excuse for existence, except the further- 
ance of the personal aims of the promoters. The fullest possible if 
publicity concerning the initial acts of every new company is f 
believed to be the only remedy for the existing evils. 

It frequently occurs that subscribing stockholders are not 
required to pay the full amount of their stock upon subscrip- 
tion, or when it is issued, but that the balance that may be due 

the corporation is subject to the "calF' of the 
Subscriptions dircctors. The usual penalty imposed upon the 

stockholders for failure to respond to the "calP^ 
is the forfeiture and sale of their stock upon reasonable notice, 
and the proceeds of such sale are used to pay the obligation 
contracted by the subscriber. The subscriber is also liable to 
the corporation for unpaid subscriptions, and failure to respond 
to the "calP generally renders the subscriber liable to suit for 
the recovery of the unpaid balance. 

In corporations conducted for the benefit and profit of mem- 



KINDS OF STOCK. 385 

bers, the interest of each is represented by the number of shares 
of stock which he holds. These shares of stock may be trans- 
ferred or assigned^ and the person to whom they 
stock °^ ^^^ ^^^^ transferred becomes entitled to all rights 

belonging to the assignor. In case of death of a 
shareholder his legal representatives succeed to the ownership of 
the stock. The ordinary stock of a corporation is called common 
stock to distinguish it from preferred or other kinds. 

Each share of stock in a corporation has what is technically 
termed a par value. This means the value indicated on the face 
of the stock certificate itself, which usually ranges from $1 to 
$100 per share. A great many mining corporations have stock at 
a par value of $1, while manufacturing and mercantile corpora- 
tions usually have stock at the par value of $100. Other cor- 
porations have stock at the par value of $5, $10, $25 and $50 a 
share. The entire issue of stock is universally of the same par 
value. The par value of stock may differ from its 
MYrke^vauTe^ market value. The market value of stock is 
usually ascertained from what the buying public 
would pay for the stock in open market. Some stocks have a 
market value much greater, even several times greater, than 
their par value. This is usually caused by the large earnings 
of the corporation making the stock a valuable investment, and 
the demand of investors for stock regularly earning large divi- 
dends causes the market value to appreciate. It, of course, 
naturally follows that there are stocks in many corporations that 
have no market value, and others whose market value is 
less than the par value. It is not uncommon that stocks in 
national banking corporations have a market value largely ex- 
ceeding the par value, although the dividends are not necessarily 
larger than stocks of other corporations of a lesser market value; 
the usual careful management of national banks, coupled with 
the watchfulness of government officers over their affairs and the 
laws regulating them, insures to the public, in a very large 



1i 



286 CORPORATIONS. 

measure^, the safety of the investment and the stability of the 
corporation itself^ which frequently appreciates the value of the 
stock of such institutions to a higher market value than stock in 
other corporations earning much larger dividends. 

Preferred stock is that which entitles its owner to profits 
or dividends in preference to other stockholders. ^^Guaranteed/^ 
^^preferential/^ ^^preference'^ and like expressions mean the same. 
^"^Interest bearing^^ stock is a species of preferred 
stock^**^ stock similar to a bond^ since the company has 

promised to pay interest in the nature of a fixed 
dividend upon such stocky in preference to the common stock. 
In case of preferred stocky its dividends are to be paid out of 
the profits of the company firsts, and the common stock is then 
entitled to what remains. 

In the cases of certain trading and manufacturing concerns, 
instead of issuing bonds for borrowed capital^ they issue pre- 
ferred stocky in one or more classes, such as first preferred, sec- 
ond preferred and then common stock. Such stock usually has 
^^^cumulative'' dividends, which means that a dividend passed 
at one period must be made up from future earnings before 
the unpreferred shares receive any portion of the profits. 

Such preference stocks are almost the same as bonds, the J 
difference being that they may or may not have preference of 
claim against the assets of the company in case of failure, de- ' 
pending upon the conditions under which they were issued, 
and the dividends are not absolutely due and payable, like the 
interest on a bond. In a year of depression or loss the dividend 
on preferred stock can be passed, and will cumulate, but in the 
case of bonds, if the interest is not paid foreclosure may result. 
Therefore preferred stock is better for the company than bonds, 
although the holder of the bond may feel more secure on ac- 
count of the annual payments of interest being obligatory. 

Since preferred stockholders have rights superior to common 
stockholders, in reference to dividends, it is essential that the 



\ 



1 



PREFERRED STOCK. 287 

creation of preferred fctock should be strictly in accordance with 
the statutes of the state in which the company is organized. If 
Creation of ^^^ stock is divided into the two classes before 

Preferred being Subscribed^, every one subscribing to either 

class of stock assents to the conditions, but in 
case a company issues only common stock and afterwards 
finds itself short of capital to conduct the business, it may then 
issue preferred stock, as a means of raising funds. This can 
only be done, however, after a unanimous vote of all the holders 
of the common stock, properly certified to the Secretary of State 
and his permission received. The holders of the common stock 
thus agree to surrender the first earnings of the company to the 
preferred shareholders with the hope that by means of the 
additional capital and good management, there may be a profit- 
able remainder left for them. 

Many corporations reserve in the hands of the treasurer a 
quantity of stock to be sold or given away at some future time, 
a*s occasion or policy may require, for the promotion of the 
business. This is called treasury stock, and is the property of the 
corporation. In case the stock is given away or sold at a dis- 
count, however, should the company become in- 
Treasury stock solvcut, thosc holding such stock would be liable 
to the creditors of the company for the difference 
between the amount paid for the stock and its par value, and 
this notwithstanding the stock should bear the words ^^paid up 
stock^^ or "fully paid and non-assessable.^' Thus it will be seen 
that any person who accepts stock as a gift from a corporation 
for his "influence'' or on account of his "standing" in the busi- 
ness community assumes a liability — not to the company if the 
stock is marked "paid up stock," but to the creditors in case 
the company fails. 

Sometimes the stockholders of a corporation, after com- 
plete organization and during its business life, donate by mutual 
agreement a certain percentage of their stock to be held in the 



288 CORPORATIONS. 

treasury of the corporation and sold, and the proceeds used in 
the corporate enterprise. This stock is also called ^^treasury 
stock.^^ This plan is often adopted by stockholders of an in- 
solvent corporation or of one whose assets are impaired, and the 
corporation is by that means made solvent. This plan is resorted 
to in many instances instead of an increase of capital stock. An 
increase of capital stock would not benefit the corporation unless 
the stock were donated to it, and under the circumstances could 
not be sold as readily as the treasury stock donated in the other 
method. 

Watering stock consists in increasing the amount of stock 
issued beyond the value of the assets of the corporation. It 
is an art in which the present generation seems to have become 
expert, and by means of its clever manipulation great ^'oper- 
ations'' have been financed, to the enrichment of the manipulat- 
ors. Suppose a gas company has a franchise to supply the city 
and public with gas, and charges what is believed to be a fair 
price therefor. After the company is well ^^a-going,'' by means 
of good management or through the invention of improved 
processes of manufacture it finds that it is making a very large 

profit and will be able to declare an exorbitant 
WateredLStock dividend. Knowing that if the public were aware 

of its large profits there would be an immediate 
clamor for a reduction in the price of gas, it sets about increas- 
ing its capital stock to two or three times the original amount 
and distributing it among the stockholders so that the rate of 
dividend w^ill be reduced to the normal income on capital. 
Then again a corporation operating under a franchise for a town 
or city, like a street railway, may have a stipulation in its fran- 
chise that all net earnings over a certain percentage shall be 
paid into the municipal treasury, as a compensation for the use 
of the franchise. By watering its stock it manages to keep the 
percentage of earnings below the limit and thus avoids payment 
of the excess rightfully due to the municipality. 



WATERED STOCK. 289 

The stock of a corporation is sometimes watered by the 
officers or a few large stockholders for their own benefit. They 
represent that it is necessary to largely increase the capital stock 
of the company in order to enlarge the plant, etc. After the 
increase has been voted by the stockholders and authorized by 
the Secretary of State, the few who are manipulating the deal 
make a loan to the company and take the new stock in abundant 
quantity as security. Of course there is a default in the payment 
of the loan when due and the stock becomes the property of the 
lenders. In the case of many corporations of a speculative char- 
acter the stock consists largely of water from the first, the actual 
assets bearing a small proportion to the capitalization of the 
company. The officers and promoters sell the stock to outsiders 
until they have secured sufficient money to conduct the enter- 
prise, and retain the balance (usually a large portion) for them- 
selves. This is term^ed ^^getting in on the ground floor.^^ Of 
Inducements coursc watering stock is an illegal proceeding, 
to Stock usually engaged in for the purpose of deceiving 

atenng ^^^ public, and may be punished by the revocation 

of the company^s charter. But an increase of the capital stock 
above the tangible assets to a point which will include the value 
of the franchise or "good wilF^ is perfectly legitimate, for the 
latter may be the most valuable asset of the company. Corpora- 
tions are sometimes inclined to place a very large valuation upon 
the "good wiir' or franchise, especially if they are earning large 
dividends, owing to the prejudice in the public against larger 
dividends than the usual rate of interest on loans. A firm may 
earn 10 or 15 per cent, upon its capital and nothing is said or 
thought of it, but if that firm should organize into a corporation 
and earn the same profits, it would be severely condemned by 
public opinion. Public sentiment is therefore a constant pres- 
sure upon corporations to drive them to stock watering. 

Money earned by a corporation over and above its expenses 
remains the property of the company until the directors declare 



290 CORPORATIONS. 

a dividend^ when it becomes the property of the individual stock- 
holders. The company may then distribute the entire net earn- 
ings as dividends or it may reserve part of the earnings of a 
prosperous year to make up for possible lack of profits in future 
years^ or it may invest a portion of its net earnings in improve- 
ments of the plant and distribute the remainder as dividends. 

Again it mxay^ by vote of the stockholders^ declare 
Dividends a stock dividend^ that is^ a dividend payable in 

stock instead of cash. This is equivalent to an , 

increase of the capital stocl of the company and must be certi- I 

fied to the Secretary of State. A stock dividend is perfectly I 

legitimate and proper when the entire net earnings of the busi- * 

ness are needed to improve the plants thereby increasing its value ^ 

to correspond with the increase of the capital stock.* When | 

stock is sold the dividend goes to' the buyer, unless otherwise \ 

agreed, and unless the dividend has been declared. If the divi- f 

dend has been declared it becomes in a sense separated from | 

the stock and is the personal property of the one who owned the I 

stock at the time it was declared. i 

Fictitious dividends are those which are supposed to be earned I 

by the company, but are really paid out of the capital or from ^ 
borrowed money. The object is to deceive stockholders into 

believing that the company is prosperous when it is not, thereby j 

inducing them to purchase more stock or persuade i 

Dividends their friends to do so. When stockholders become I 

suspicious false statements are made as to the earn- * 

ings, expenses, value of the franchise, etc., and thus they ; 

are quieted, while the manipulators of the company's affairs 
ft 

♦The issuance of a stock dividend, although in many respects analogous I 
to stock watering, is not open to the same objection, since the issuance of 
the additional stock does not involve a marking up of the book value of the 
company's assets beyond their actual value. Some of the best managed 
companies pursue the policy of paying very small cash dividends and capi- 
talizing their surplus accumulations in this way from time to time, thus 
keeping most of the earnings in the business while giving the stockholders 
what amounts to a fair return on their investment. 



1 



DIVIDENDS. 291 

perhaps are selling out or ^^unloading" their stock quietly ;, at a 
good price^ leaving the corporation wrecked. In rare instances, 
however^ fictitious dividends may be justifiable. Thus when 
a succession of prosperous years is followed by one of disaster and 
loss, after which the business promises good returns again, it 
may be proper to continue the same dividends through the bad 
year, rather than destroy the regularity of them to stockholders. 
An illustration of this policy is the Chicago, Burlington & 
Quincy Eailroad Company. In 1888 the company suffered se- 
verely on account of a strike among its locomotive engineers. 
Though frankly admitting that no dividends were earned that 
year, the company paid the usual dividend rather than disturb 
the value of its stock and disappoint shareholders. Under the 
circumstances this was justifiable. 

Corporations are not permitted in law to declare and pay 
dividends upon stock when their assets, at a fair valuation, are 
not sufficient to pay their outstanding indebtedness to creditors in 
full, and if directors and officers of a corporation knowingly 
declare and pay dividends under such circumstances, they are 
generally held individually liable for all of the existing debts 
and obligations of the corporation and those subsequently con- 
tracted. The payment of such dividends is considered a fraud 
and has in instances been indulged in to procure to the stock- 
holders assets of the corporation which should 
Dividends ^^^^ S^^^ ^^ ^^^ payment of corporate indebted- 

ness. As long as the corporation is solvent and 
has ample assets with which to discharge its existing indebted- 
ness, there is usually no restraint upon paying dividends, though 
unearned. This is a dangerous proceeding, at all events, and 
the creditors, whose obligations have accrued subsequent to 
the payment of such dividends, are, under some circumstances, 
permitted to recover from the stockholders the dividends so paid, 
when subsequent insolvency demonstrates that the capital was 
impaired by such payment of dividends, and suspension of busi- 
ness and failure followed. 



292 CORPORATIONS. 

The surplus fund^ reserve fund;, or sinking fund is the ac- 
cumulation of a portion of the net profits of the corporation 
set aside each year as a contingent fund to liquidate a debt^ meet 
reverses or enable the company to declare a uniform rate of 
dividend whether the earnings are uniform, or not. For the 
purpose of marketing the stock and avoiding the fluctuations in 

value which would be caused by a fluctuating divi- 
surpius dend^ the surplus fund is created/ and if the net 

earnings should fall below the usual minimum 
dividend limits the surplus is then drawn on for the deflciency. 
This enables the company to declare a uniform dividend^ gives 
better satisfaction to the stockholders^ who know about what 
dividends to expect^ and makes the stock much more salable and 
desirable to investors. 

A sinking fund may be created to meet an outstanding obliga- 
tion falling due at some future date. If it is a bond issue/ the 
deed of trust given as security for the bonds usually provides 
that a certain sum shall be set apart out of the net proflts and 
paid to the trustee. The trustee then invests these sums in the 
company^s bonds of the issue to be retired^ or any other issue of 
the company, according to the provisions of the trust deed, and 
these are held in trust until the final settlement, when the ma- 
tured bonds are canceled and returned to the corporation. The 
trust deed may provide that the trustee is to invest the sinking 
fund in bonds of other companies or it may be left to his dis- 
cretion. 



CHAPTEE XXX. 

CORPORATIONS— Continued. 
DIRECTORS; DUTIES OF OFFICERS; BY-LAWS; RECORDS. 

The owners of the stock of a private corporation, as soon 
as the charter is granted by the state and the corporation fully 
organized^ proceed to choose and elect a board of directors, and 
the board of directors, after their election, proceed among them- 
selves to elect the officers of the corporation. It is generally neces- 
sary that at least a portion of the directors must 
Directors ^^ residents of the state which granted the cor- 

porate charter. The number of directors ranges 
from three up to practically as many directors as is considered 
necessary to conduct the business of the corporation. 

It is usual in large corporations doing an extensive business 
to elect directors in three classes, one-third to be 
elected for one year, one-third for two years and one-third for 
three years. The reason for this is to prevent a complete change 
in the board of directors at any one election. Good business 
prudence demands that a large proportion of the directors re- 
main in oflBce because of their familiarity with the details of the 
business being conducted. If this method is adopted, at the 
expiration of one year from the first election an election would 
be held to elect directors to fill the places of those elected for 
one year, thus retaining in office the two remaining classes 
whose terms have not expired, and so on with the other classes 
of directors as their terms of office expire. 

The directors, immediately after their election, hold a meet- 
ing called a ^"^directors^ meeting.^^ At this meeting the directors 
elect the officers of the corporation, which usually consist of 
a president, secretary and treasurer. Other officers of the cor- 

29a 



294 CORPORATIONS. 

poration are frequently a number of vice presidents^ an assistant 
secretary and an assistant treasurer. These are customary officers 
of large corporations and not usual in small concerns. 

It is generally the duty of the board of directors to formulate 
and adopt by-laws which are made for the government of the 
officers;, directors and affairs of the corporation. 
By-Laws These by-laws are required by law to be reason- 

able and to be in conformity with the provisions 
of the charter and the statutes of the state under which the 
corporation is organized. The by-laws should prescribe the 
number of directors^, the oflBces to be filled by election^, the 
mode and manner of calling general and special stockholders' 
meetings^ general and special meetings of directors^, general and 
special elections of the directors and officers^ and the duties of 
the individual directors^, officers and agents of the corporation, 
and should provide for the term of office of the directors and of- 
ficers to be elected. 

The president of a corporation is usually considered the 
legal head of the corporation^ and when an act pertaining to 
the business of the corporation is performed by 
President him^, it is Considered that he has binding authority 

to act as the agent of the corporate body. The 
president, however, is subject to the regulation of the board of 
directors and also to the restrictions and regulations prescribed 
in the by-laws. 

The general duty of the secretary is that of custodian of the 
books and records of the corporation and the corporate seal, 
and to attach the corporate seal to written instruments when 
required. The president and secretary are the 
Secretary officcrs usually authorized by the board of direct- 

ors to execute any instrument, note, bond, bill of 
sale, etc., in the corporate name, and under the corporate seal, 
that may be necessary to be executed by the corporation. 

The usual duties of the treasurer are those of a fiscal agent. 



BY-LAWS. 295 

to keep the funds of the corporation in some safe depository, 
to keep the officers and directors informed as to the financial 
condition of the corporation and the amount of funds in its 
treasury, and to prepare and keep the financial records of the 
corporation. The treasurer is the officer usually empowered to 
sign checks and to pay out the funds of the cor- 
Treasurer poration, but, like the president and secretary, he 

is bound by the by-laws and should never pay 
out money in any large amount unless specifically authorized 
by the board of directors to do so, or unless the corporate business 
is such and the by-laws so stipulate, that such payment should 
be considered one of the regular duties of the treasurer. 

The by-laws of a corporation should provide for frequent 
stated meetings of the directors, who should assemble at the 
general offices of the company under parliamentary rules of 
order, and in such manner transact the business of the corpora- 
tion. The president of the corporation, by virtue of his office, 
presides as chairman of the meeting. Eeports from the treas- 
urer and secretary and of the general manager (in 
Director ° Corporations where there is such officer) are read, 

and from the reports and recommendations of 
those officers the business is taken up. It becomes the duty of 
the secretary to keep full and complete ^"^minutes^^ of what trans- 
pires at the directors^ meetings as well as at the stockholders' 
meetings. These "minutes'' should be transcribed fully into a 
book kept for that purpose, known as a "minute book." The 
business should be transacted by resolutions voted upon by the 
president putting the question and calling for "Yeas" and 
"Nays." The majority favoring or disapproving a resolution 
generally decides the action of the directors upon the matter. 

The duty of the secretary in keeping and in transcribing 
these "minutes" is a very important one, as often very important 
transactions are invalidated or made uncertain by carelessly or 
mistakenly transcribed "minutes." Every reasonably important 



296 CORPORATIONS. 

act of a corporation should be first voted upon by tbe board of 
directors and the resolution correctly transcribed into the ^"^min- 
ute book^^ by the secretary. The '^^minutes'^ when 
Secretary transcribed into the minute book should show 

what directors and officers were present and 
those that were absent, and should always show that a '^quorum'" 
was present. A quorum is the number of stockholders or 
directors, usually a majority, prescribed by the laws of the 
state and the by-laws of the corporation as being necessary for 
the holding of a valid meeting for the transaction of corporate 
business, and if a meeting is called and there is not a quorum 
present, the meeting has no power to transact any business ex- 
cept to adjourn to some particular time and place. A very im- 
portant duty of the board of directors, which is frequently 
neglected and omitted, is the auditing of current bills owing 
by the corporation, and ordering the treasurer to make proper 
payment. Great evils have grown out of the practice of allowing 
a treasurer to audit and pay bills at his own discretion. The 
best regulated corporations always strictly observe this rule. 

When the minutes of the corporation are transcribed by 
the secretary into the minute book they should be signed by the 
president of the corporation and ^^attested" by the secretary. 
These signatures are very strong marks of authenticity and 
should never be omitted. Under no circumstances should min- 
utes be transcribed upon loose sheets of paper 
Minutes and kept unbound or pasted into the minute 

book instead of having them written therein in 
regular manner. It is usual at the next succeeding meeting of 
the directors or stockholders to ^'^approve'' or order ^^corrections" 
in the minutes of the preceding meeting as the case may re- 
quire, and the subsequent approval of the minutes confirms 
the prior resolutions and the acts of the various officers perform- 
ing them. 

The secretary of a corporation should keep a book, called 




OFFICERS. 297 

a ^^stock certificate book/^ from which book stock certificates 
should be issued and a record kept of the date^ the number of 
shares^ and to whom issued^ and where stock is 
certfficates transferred from a stockholder to any person the 

original certificate should be surrendered and the 
secretary should issue a new certificate in lieu of the old one, 
which should be canceled and attached to its former stub in 
the certificate book and proper record kept of the transaction. 
It is usual to include in the by-laws a provision for the 
removal from office of directors or officers in the event that 
the majority may deem it for the best interests of 
o^erT ° ^^^ corporation. This provision is usually fol- 

lowed by a further provision giving directors the 
power of appointing a successor or of calling a special election, 
to fill the vacancy caused by such removal. 

The officers and directors of a corporation are required to 
be particularly careful that no act is done by the corporation 
which is in violation of the laws of the state or of 
Illegal Acts the powcrs conferred by the charter. The direct- 

ors and officers are personally liable for such illegal 
acts, and it frequently subjects the corporation to the liability 
of a forfeiture of its charter. 

The directors of a corporation must act as a board and not 
singly. Several directors cannot bind the corporation by their 
several acts unless the acts are directly within the scope of their 
authority. All contracts — conveyances of corporate property — 
the creation of corporate liability — should be authorized by the 
board of directors in meeting assembled. The authority should 
be by resolution, which should be fully transcribed into the 
minute book by the secretary. Directors who 
Important ^^^^ ^^ hiiid the Corporation by their individual 

acts, subsequently repudiated by the corporation, 
are personally liable to the aggrieved party. It sometimes be- 
comes necessary, on account of some emergency, that the officers 



298 CORPORATIONS. 

of a corporation consisting nsnally of president, secretary and 
treasurer, are called upon to perform an important act before 
it is possible to convene a meeting of the board of directors. 
Such acts are excusable under the circumstances, but should 
immediately be ratified by the board of directors in regular 
manner. If power to perform important acts is conferred by 
the by-laws upon any of the officers of the cor- 
signature poratiou, the board of directors at frequent inter- 

vals should call a meeting and ratify, approve and 
confirm the acts of the officers, letting the minutes show in 
detail the acts and transactions confirmed. 

Where the corporate signature is required to be signed to 
written documents, it should be the name of the corporation 
"by its president^^ and "^^attested^^ by its secretary and sealed with 
the corporate seal. An example of a proper corporate signature 
is as follows: 

'The Chicago Coal Mining & Quarrying Co., 

By John Doe, President. 
Attest: Eichard Eoe, Secretary. 
[Imprint of corporate seal.] 

The seal of a corporation is generally a device embossed 
upon the document to be signed, being the name of the corpora- 
tion, with the location of its principal place of business, as 
"Chicago, 111.^^ and the word "seal.^^ The "attaching'^ or "affix- 
ing'^ of the seal is the act of imprinting the device upon the 
document to be executed. 

Seals were in olden times used as signatures by individuals, 
and originated from the ignorance of the masses of the common 
people, who were unable to write their signatures. Upon the 
advent of corporations, which, being unable to phy- 
Seai sically do any act, or to write a signature, a "cor- 

porate seaF' w^as used as the supreme designation 
of a corporate signature, the signatures and attestations of its 
officers being considered of less consequence than the "affixing'^ 



i 



OFFICERS. 200 

of the corpor-ate seal. At the present time it is not always neces- 
sary^ but advisable^ to attach or affix the corporate seal to all 
documents executed in the name of the corporation. The ^'^adop- 
tion^^ of a corporate seal is one of the first acts of the directors of 
a corporation. The by-laws should prescribe the style of seal 
and designate the officer^ universally the secretary^ to be the 
custodian of it and affix it. 

The exister«ce of a corporation can be terminated at the will 
of the stockaolders, who may^ by voting so to do^, surrender the 
charter of the corporation to the Secretary of State to be can- 
celled. Before this can be done^ however^ proof 
Ex^isten^e^" ° uiust be furnishcd the Secretary of Sta4e that all 
the corporate debts have been paid and the remain- 
ing assets and property distributed to the shareholders. This 
plan often becomes advisable when the corporate enterprise is no 
longer considered profitable, and to further maintain the cor- 
poration would mean an unprofitable expenditure of time and 
money by the stockholders. 



CHAPTER XXXI. 

CORPORATIONS— Continued. 

SUBSIDIARY CORPORATIONS; CONTROL AND MANIPULATIONS. 

Subsidiary or auxiliary companies are those which are 
formed or controlled by^ or are dependent upon some large com- 
pany. It frequently becomes necessary in order to promote the 
success of a corporation to organize a subsidiary company as a 
feeder or helper^ for the purpose of carrying out a particular 
part of the enterprise, such as supplying the corporation with 
raw material, disposing of its finished product, called a "selling 
company/^ constructing buildings or bridges, called a "construc- 
tion company,^^ etc. It may be that the parent company 
has not sufficient means to properly carry out a subordinate pur- 
pose or develop an enterprise which will be collat- 
Confpai^es ^^^^ ^^^ ^^^J beneficial to the company. A new 

and subordinate company may then be formed out 
of the capital furnished by those stockholders of the parent com- 
pany who may have money to invest, and the building or other 
property of the subsidiary company may then be leased to the 
parent company. Thus a railroad company, through a subsidiary 
corporation, builds a hotel at a summer or winter resort where 
one is needed, hoping thereby to increase its passenger travel, or 
develops large sugar plantations along its line to add to its 
freight traffic. An electric street car company needing a new 
power house and not having the necessary funds with which to 
build it, and not wishing to issue bonds or increase its capital 
stock, forms a subsidiary company by which the power house 
is built and leased to the controlling company. Nearly all of 
our railway systems have branch lines, which at greater or less 

800 



SUBSIDIARY COMPANIES. 301 

length reach from the main line into some agricultural section 
or to mines or cities located away from the main line. In this 
way transportation facilities are furnished to distant sections 
and an outlet is afforded them for their products, while the 
earnings of the main line are perceptibly increased by the busi- 
ness brought to it. Sometimes these branch lines have been 
expensive to build, where the attempt is to reach some min- 
ing district, and the money for their construction was obtained 
by issues of branch line bonds by the subsidiary company which 
may have been guaranteed by the parent company or were made 
valuable on account of a lease contract with the controlling com- 
pany whereby the income of the branch road is assured, and the 
interest on its bond issue and sinking fund is provided for. 

Another reason for the formation of subsidiary or auxiliary 
corporations is the manufacture and control of by-products. 
Take, for instance, a corporation engaged in mining coal. It 
frequently becomes necessary in developing the vein of coal to 
remove a large quantity of fire-clay, also a red shale, which 
products in themselves are valueless to the coal mining cor- 
porations, but a subsidiary or auxiliary company is formed for 
the purpose of manufacturing the fire-clay into fire-brick or 
other marketable product, and another corporation 

To Control • j? t i? j.i j? • it 

By-Products ^^ formcd lor the purpose of preparing and vend- 
ing the red shale, which is a cheap and excellent 
material used in the construction of roads. These companies 
are, of course, dependent upon the ^^parent" corporation for their 
raw material and are usually related by contracts specifying the 
price to be paid for this material, and requiring that the parent 
corporation shall furnish such quantity of raw material as may be 
agreed upon as being sufficient for the purposes of the subsidiary 
corporation. 

Perhaps the reason most frequently met with for the forma- 
tion of subsidiary companies is where a corporation owning 
patent rights or franchises parcels out the territory which it 



302 CORPORATIONS. 

controls to various subsidiary organizations^ which may pay 
yearly royalties or percentages^, or may pay for the privileges 
they get by giving a ^*lump sum'^ in cash, or by 
Territory*'^ giviug the parent company a part of their capital 

stock, or by a combination of all of these ^^consid- 
erations/' In this way the stockholders of the parent company 
avoid much of the risk, and also the necessity of raising a large 
cash capital. This method has been pursued by the American 
Bell Telephone Company and other well known companies with 
signal success. Subsidiary companies, while being distinct cor- 
porations, are dependent upon the controlling company, usually, 
for their existence, and almost universally for their JSnancing 
and management to a considerable extent. 

Auxiliary companies are sometimes the medium through 
which profits that should belong to stockholders of the parent 
company are diverted to the pockets of the directors and their 
associates. In the history of railroad building in the United 
States there are many instances where the man- 
Ma^nipuiations ^gcrs of a railroad company have organized a so- 
called ^^construction company'' to build an exten- 
sion to its lines, and have then formed a separate corporation in 
which the ownership of the extension was nominally vested, 
and which proceedod to make a contract with the construction 
company to build and equip its line, paying for it with its bonds, 
issued for an amount in excess of the actual cost, and also with 
its entire capital stock, which by some fiction of bookkeeping was 
made to appear paid up in cash. The extension having been 
built with the proceeds of the bonds, or perhaps a part of them 
only, the next step was to sell or lease the new line to the old 
company on terms that made the stock held by the construction 
company a valuable asset. This and the remaining bonds, if any, 
could then be divided in kind or sold and the proceeds dis- 
tributed in cash. The morality of such a transaction as this is^ 
to say the least, questionable; though judgment should not be 



CORPORATE CONTROL. 303 

passed in any specific instance without full knowledge of all the 
facts. 

Of late corporations have been organized for a new functiciij, 

i. e. that of holding a controlling interest of the stock of other 

corporations. The validity of these "parasite corporations/^ as 

they have been called, is yet to be passed upon by 

Securities |]^g courts. If permitted to stand, they may have 

Companies ^ i. • • i- 

lar reaching consequences by giving a lew men 
control of large interests^ although owning comparatively little 
capital. Let us consider the case of a stockholding corporation 
with, say, $60,000,000 capital and this capital invested in, say, 
51 per cent, of the stock of a railroad capitalized for $100,000,- 
000. The holders of a bare majority of the stock of the stock- 
holding or parasite corporation would then exercise control 
over both corporations. Thus $30,000,100 of stock would be 
able to control $100,000,000 of capital. But let us carry this 
one step further and suppose a majority of the stock of the 
parasite corporation held by another company of the same kind 
with a capital of, say, $31,000,000. The owners of only a little 
over $15,500,000 of its stock would then exercise effective con- 
trol of the $60,000,000 company, and through it of the $100,- 
000,000 company. This is an instance of a lesser corporation 
controlling a greater. It is diametrically the opposite of the 
subsidiary corporation. An example of a parasite corporation 
is the Northern Securities Company, recently organized for the 
purpose of merging the control of the Great Northern, Northern 
Pacific and Chicago, Burlington & Quincy Railroads. This 

attempt of merger has been declared illegal by the 
Merger niegai courts on the ground of public policy, since such 

a combination w-ould remove competition, the 
three roads being nearly parallel. The method of controlling 
a greater corporation by means of a securities company holding 
a majority of the stock, however, is a legal proceeding, in all 
of those states where one corporation is permitted by statute 



804 CORPORATIONS. 

to own shares in another. It is merely an extreme exercise of 
the principle of ^^majority rule/^ 

Stockholding corporations designed to control greater cor- 
porations by means of the majority rule^ as outlined above^ savor 
somowhat of the methods of the so-called ^^trusts/^ which will 
be considered in the next chapter. 



CHAPTEE XXXII. 

CORPORATIONS— Continued. 

COMBINATIONS; TRUSTS; PROMOTION; UNDERWRITING. 

The word trust has been perverted during recent years from 
its proper signification. Properly speakings trusts are of many 
kinds^ but they all imply the placing of property or power^ or 
both, in the hands of agents who are called trustees, and whose 
functions in relation thereto may be so broad as 
Definition of |-q permit the widest possible scope in the manage- 
ment of a business or the exercise of authority, or 
they may be limited to the merely nominal holding of title 
without any discretion or authority whatever, as in the case of 
real estate held for the benefit of another. Trusts of this char- 
acter are as old as human law and as varied as human experience. 
An example of a pure trust may be found in what is known in 
modern financiering as the "voting trust/^ 

A voting trust is an arrangem.ent whereby the stockholders 
of a corporation part with their voting power for a specified 
time or term, and thus for such time give up their control over 
the affairs of the company. The object is to prevent changes of 
management which might arise in case a majority 
Voting Trusts of the stock should change hands, thereby per- 
haps greatly diminishing its value by radical 
changes of policy. If all or a majority of the stock is placed 
in the hands of trustees, who give in return trust certificates 
entitling the holders to their dividends the investment becomes 
separated from the management. Holders of trust certificates 
may transfer their holdings, but the management continues 
unchanged. The Eeading Eailroad is an example of a corpora- 
tion controlled and managed by a voting trust. This form of 

305 



306 CORPORATIONS. 

trust is chiefly for the protection of bondholders, who are thus 
assured of a uniform management of the corporation by com- 
petent and experienced men, who will see that the interest upon 
the bonds is promptly paid, and the sinking fund provided for. 

The rapid growth and development of the manufacturing 
interests of the United States during the last twenty years of the 
nineteenth century put into vigorous operation the laws of trade, 
one of which is that as industries grow in volume they tend to 
centralize\ The large establishments can make and sell cheaper 
than the small ones. They can buy the raw material cheaper, 
avail themselves of the most approved machinery and employ 
the best skill and business ability. Fierce competition is con- 
stantly hammering down prices and the effect is to drive con- 
cerns into combinations whereby they may increase their capital 
and secure the benefits of a large volume of business. This 
tendency was manifest some years ago in the formation of cor- 
porations and changing of partnerships to corporations. The 
same causes continued to operate and produce the combination 
of corporations into trusts. 

A trust may be defined as a combination of the capital of 
several corporations under one management whereby the cost of 
production is reduced, the amount of production limited and 
regulated, and the cost of the article to the consumer is con- 
trolled. Attempts were first made some years ago to secure the 
benefits of co-operation between manufacturers by 
Trusts agreements to sell through a common agent, and 

at agreed prices, but the courts held such agree- 
ments to be not binding, and members oftea secretly violated 
them, so that it became necessary to make an absolute transfer 
of the property of each member to the trust. A trust takes the 
management and ownership of the property out of the hands 
of the various corporations composing it, and deprives them of 
the power to withdraw their assent. 

The method of procedure in the formation of a trust is for 



TRUSTS. 307 

each of the parties to incorporate his establishment^ if it is not 
already incorporated. The stock of these various corporations 
is then turned over to the managers of the trust, called trustees, 

and in return for it the trustees issue trust cer- 
How Formed tificatcs similar in some respects to shares in a 

corporation. These certificates recite that the 
holder is a beneficiary of the trust to the extent of so many 
shares; and the certificates are assignable and transferable in the 
same manner as certificates of stock, though their legal status is 
in many respects dissimilar. It will be perceived that under this 
exchange the trustees hold a majority of the stock in each of 
the corporations and are able to elect the directors and officers 
of each concern and thus control the management to the smallest 
detail. They can close one factory, enlarge another, consolidate 

others, regulate the output generally and control 
^owerso a ^j^^ price. Those concerns which refuse to join 

the combination are crushed, if possible, by com- 
petition. The certificate holders are not injured by the closing 
up of this or that establishment belonging to the trust, since 
their profits come from the whole organization and not from 
any particular part. The holders of trust certificates elect trus- 
tees annually, and with the performance of that function their 
power ends. The trust certificates are watered to the point 
where the rates of dividends will be very moderate, and then 
sold upon the stock exchange like other stock. 

This organization is called a trust because the stockholders 
part with their voting power, and practically repose absolute 
power in the trustees. The acts of the trustees and books of 
account are usually not open to inspection by the certificate hold- 
ers. No limit is placed on the amount of the trust certificates 
that may be issued, and no question can be raised as to the exer- 
cise of discretionary power by the trustees. There is practically 
no limit placed upon the powers of the trustees in conducting the 
business. 



808 CORPORATIONS. 

The greatest trusts formed in this manner were the Standard 
Oil Trust, the Cotton Seed Oil Trust and the Sugar Trust, but 

there seems no longer to be any doubt that a trus j 
Trusts Illegal formed in this way is illegal. Eecent decisions of 

our courts have so declared, on the ground of 
public policy. Hence it is that a large number of the trusts are 
now adopting a different mode of organization — that of the cor- 
poration plan, as exemplified by the Diamond Match Company. 
That company^s plan was to organize one gigantic corporation 
and have it buy up and own outright all of the competing manu- 
factories, paying for them either in cash or shares of stock. 

This form of organization, although called a trust. 
Corporations ^^ ^^ reality a great corporation, and it is certainly 

better to have the large corporation than the trust. 
The unlimited power possessed by the trustees in the case of a 
trust, their concealment of the condition of the business, and the 
secrecy of their acts, is dangerous not only to the financial wel- 
fare of the certificate holders but also to the public. 

There is another class of corporations, which are formed by 
the consolidation of several corporations into one. The method 
of forming such a consolidated corporation is to have the stock- 
holders of two or more existing corporations vote to consolidate. 
This gives birth to a new corporation. The old corporations 
are merged into the new, and although the new corporation may 

take the name of one of the old corporations, it 
of°corporations nevertheless bears the same relation to all of them. 

The new corporation issues capital stock to the 
stockholders of the consolidated corporations, sometimes share 
for share, sometimes upon an increased capitalization. The new 
corporation is liable for all the debts and obligations of each of 
the consolidated corporations, and succeeds to all the property, 
credits and effects which belonged to each at the time of the 
consolidation. Notice must be given to the Secretary of State 
of the action of the corporations in consolidating, and they must 



TRUSTS. 309 

record the proceedings resulting in the consolidation, with the 
Secretary of State, and usually in the county where the principal 
office of the corporation is maintained. 

Industrial corporations are those which are engaged in the 
manufacture of the great utilities of life, such as steam engines, 
harvesting machines, electrical apparatus, steel or oil. By com- 
bining these into a virtual monopoly, the waste and expense 
incident to competition, such as numerous traveling salesmen, 
advertising and office expenses are saved and thus the net profits 
are greatly increased. Owing to the ability of the combine to 
earn net profits greater than the total profits of the different 
concerns, under the competitive system, the combine may be 

capitalized for a much larger amount than the total 
industr^fs Capitalization of the individual concerns. Most of 

the large companies in the United States are 
financed in New York, owing to the superior facilities there for 
such transactions on account of its greatness as a financial center. 
Suppose there are a dozen companies engaged in the same line 
of business with a total capital, say, of $30,000,000. After look- 
ing the field over carefully, and acquainting themselves with 
the present and prospective earnings of the various properties, 
the promoters conclude to combine these into a single corpora- 
tion with a capitalization of $100,000,000. A corporation is 
organized with a hundred millions capital, thirty millions of 
which is to be preferred,* and seventy millions common stock. 
A suitable name, suggestive of the business and comprehensive 
in scope, is chosen. Arrangements are made by the promoters 
with several bankers in Wall Street to take portions of this 
preferred stock and pay cash for it. A block of the common 
stock goes along with each sale of preferred stock as a bonus, 
together with the privilege of naming a member of the board of 
directors of the new company. Each of the old concerns is now 



♦Instead of preferred stock, bonds may be issued, and these would be 
preferable in case the company expected to retire them. 



310 CORPORATIONS. 

bought up by the new company^ payment being made in common 
or preferred stocky or cash^ or a combination of all of these^ as 
the parties may have previously agreed.* The new company 
takes over all assets and assumes all liabilities of the old com- 
panies and provides a working capital out of the sale of the 
preferred stock. This done^, the combination is effected and the 
operation of the several properties continues uninterrupted under 
the management of the new board of directors and officers. 

Having completed the combination as outlined above^ the 
promoters find still left in their hands a handsome block of the 
common and perhaps some of the preferred stock as their com- 
pensation for putting the deal through. After the combination 
is made the Wall Street bankers first place their preferred stock 
on the market, and as the business of the new company is 
known to be prosperous, the stock sells readily. Next the 
common stock is offered and disposed of, its sale being aided by 
that of the preferred stock. 

The business of promotion is a species of agency especially 
devoted to the organization of companies and the floating of 

stocks and bonds. The promoter is one who has a 
Promotion financial acquaintance and knows where money for 

/arious classes of investments may be secured. It 
is almost necessary, however, in order to finance a large company 
that a bank or trust company should be enlisted in the operation, 
so that the sale of securities will be effected without any delay. 

The bank or trust company acting in this capacity 
Underwriting is known as an "underwriter," since it insures, or 

underwrites, the sale or disposition of the se- 
curities, taking itself such as it does not dispose of to other bank- 
ers by a given time. In this capacity a prominent New York 



♦In estimating the values of the several plants, the common method is 
to base the value upon the average earnings for a period of five years past, 
as shown by the books. Thus suppose it is agreed that the property shall 
be valued on a 10 per cent, basis, and the net earnings for five years aver- 
age $30,000, the plant would be worth .$300,000, due consideration being 
given, of course, to the condition of the property. 



MONOPOLIES. 311 

banking house* has achieved a world-wide reputation, besides 
reaping immense wealth from its operations. Sometimes the 
promoters enter into contracts with one or more bankers to the 
effect that the bank will buy a quantity of bonds upon the 
property of the new company at a given price. These contracts 
are then deposited with a trust company as collateral for a loan 
sufficient to buy up the properties (the promoters having pre- 
viously secured options on each property). After the properties 
are bought, the bonds are issued and delivered and the loan is 
repaid. 

Instances are not uncommon where consolidations are compli- 
cated by reason of the companies which it is desired to combine 
owning public franchises which are not transferable. The most 
usual way of getting around this difficulty is for 
Under^Leases ^^^ ^^^ compauy to hold the stock of the old com- 
panies, or a majority thereof, in its treasury, and 
to operate under leases from the old companies. This is the plan 
followed in the case of the street railway systems in the north 
and west divisions of the city of Chicago, where the situation 
is still further complicated by a majority of the stock of two 
companies holding such leases, being in turn held by still an- 
other corporation — the Union Traction Company. 

The evil effects of trusts and monopolies can scarcely be 
questioned, but it is far better to have the great corporation, 
although it is in effect a trust, than to have a combination of 
capital where its management is confined wholly to trustees 
not accountable to stockholders. Publicity is both the prevent- 
ive and cure for a great deal of rascality in the world. In case 
of the great corporation, it pays its tax to the state, and is 
subject to proper limitations. Creditors are able to judge of its 
financial condition, and the public may determine whether it is 



♦J. Pierpont Morgan & Company. So successful has this firm been as 
underwriters that other bankers readily accept bonds and stocks offered by 
them, and thus through tliem promotion becomes comparatively easy. 



312 CORPORATIONS. 

conducting business within the limits of its charter. But 
whether the trust is a combination formed Under the purely trust 
method^ or a gigantic corporation, its objects are the same: the 
creation of a monopoly and the control of the market. For this 
reason public sentiment is hostile to it. Judge Thomas M. 
Cooley, a few years ago, speaking of trusts, said: 

^^A few things can be said of trusts without danger of mis- 
take. They are things to be feared. They antagonize a leading 
and most valuable principle of industrial life in their attempt not 
to curb competition merely, but to put an end to it. The case of 
the leading trust of the country has been such as to emphasize 
the fear of them, and the benefits that have come from its 
cheapening of an article of commerce are insignificant when 
contrasted with the mischiefs that have followed the exhibitions 
in many forms of the merciless power of concentrated capital/^ 



• 



CHAPTEK XXXIII. 

CORPORATIONS— Continued. 

RECEIVERSHIPS; REORGANIZATIONS. 

The affairs of private corporations are frequently wound up 
under the control of a receiver, who is appointed upon the 
application of some interested party by a court, usually in the 
county where the corporation has its principal place of business, 
or where some of its property is situated. There are many 
grounds for the appointment of a receiver. Chief among them 
is the doing of some illegal act by the corporation or its agents, 
which would subject the corporation to a forfeiture 
Receiver of its charter, or when the corporation refuses or 

fails to pay a judgment or decree for money, or 
otherwise is unable to meet its obligations. A receiver is an 
oflBcer of the court. He acts under the direction of the court 
and must report all of his doings to the court. His chief duty is 
the conservation of the company^s property until it can be de- 
termined whether the business is to be continued or must be 
wound up, and if the latter, then to dispose of the assets and 
distribute the net proceeds to the proper persons as the court 
may direct. 

The function of a receiver is often, therefore, a very im- 
portant one. It frequently happens that the interest of all 
concerned requires the business to be continued while proceed- 
ings are pending, and in such cases the receiver is usually given 
the necessary authority. An illustration of this 
Receive^ would be in the case of the financial embarrass- 

ment of a manufacturing concern having on hand 
a large quantity of partly finished goods of little value in that 
condition, but which by the expenditure of a small amount of 

313 



•314 CORPORATIONS. 

money could be finished and marketed at a fair price. The 
receiver thereupon runs the factory under the supervision of the 
courts long enough to complete the product then under con- 
struction^ which is sold by the receiver when completed, and 
the creditors thereby receive a much larger percentage on their 
claims than would be the case if the product were sold by the 
receiver before its completion. The chief reason for the appoint- 
ment of a receiver^, however^ is to enforce a ratable distribution 
of the corporate assets among the creditors. 

A corporation is said to be insolvent when its assets at a 
fair valuation are insufficient, if sold, to discharge the existing 
obligations to corporate creditors. It is possible 
Insolvency that a Corporation may be solvent, yet its stock 

practically worthless. Such would be the case of 
a corporation having just enough assets when sold to pay cor- 
porate creditors, leaving nothing for distribution to the stock- 
holders in return for the sum invested by them in their stock. 

When a corporation becomes insolvent or unable to pay its 
debts, or has exceeded its corporate powers, a court of equity 
will, generally upon the application of a creditor or stockholder, 
take charge of the affairs of the corporation and appoint a 
receiver to either continue or close up the business, subject to the 
court's direction. The directors of a corporation formerly had 
no power to commence proceedings for a dissolu- 
Receive^s ^^^^ ^^ ^^^ Corporation and appointment of a re- 

ceiver or for the distribution of its assets among 
the stockholders, but the Supreme Court of the United States 
in the Wabash Eailway cases laid down the doctrine that a com- 
pany could itself ask for the protection of the court if such 
was for the best interests of all concerned. Under this doctrine ■ 
many corporations are placed in the hands of ^^friendly'^ receiv- 
ers, by means of proceedings and without notice to other credit-| 
ors and the public, thus opening the door to great abuses of] 
corporate privileges and no doubt in many instances inflicting j 



RECEIVERSHIPS. 315 

serious loss and injury on innocent stockholders. Directors 
sometimes mismanage corporations in order to get them into 
trouble and then by defaulting on the interest or other obliga- 
tions of the company bring about a receivership and reorganiza- 
tion in order to "freeze out" and get rid of the stockholders and 
acquire the assets^ after which the business is continued pros- 
perously. Corporations sometimes procure the appointment of 
friendly receivers and effect a reorganization in order to get 
rid of certain bonds, guarantees, leases or other contracts which 
have proven unprofitable. Such proceedings, however, cannot be 
justified on grounds of business honor. 

Only stockholders and creditors of an insolvent corporation 
are concerned in the settlement and distribution of the estate. 
The public generally has no interest in the matter. But in the 
failure of large corporations upon which the public is accustomed 
to depend for a particular service, like a railroad company, and 
especially one having subsidiary companies, the public is interest- 
ed and the matter brings up a multitude of complications. The 
road must be kept running. It cannot be shut down, the property 
sold, creditors paid and assets distributed among stockholders, as 
in the case of an ordinary private business. Salaries and other 
running expenses must be paid and the business tided along 
until the entire property can be sold in bulk or a reorganization 
of the corporation is effected. When entering upon his 
duties the receiver will usually find many debts 
Receiverships Unpaid and pressing repairs needed, with a con- 
stant deficit in cash to meet current expenses. 
The court will then authorize the issuance of receiver's cer- 
tificates for the purpose of raising the necessary funds to carry on 
the business. These certificates are a first lien upon the prop- 
erty of the corporation, coming in before first mortgage bonds. 
Sometimes the cash requirements of the receiver are met by an 
assessment upon the stock and bonds of the company. The 
stockholders and boldholders may as well submit to an assess- 



316 CORPORATIONS. 

ment as have receiver's certificates issued^ which are a first 
claim upon the assets. 

Having the immediate necessities of the corporation pro- 
vided for in cash, the receiver usually finds it necessary to have 
the accounts of the company gone over carefully in order to 

ascertain what the actual earnings of the business 
Reorganization are. The prospccts of the future business of the 

company are also taken into consideration, and 
with these at hand a reorganization committee* or banking firm 
is able to determine what the earning power of the company 
after the reorganization will be, and hence what its capital may 
be. If the capital must be reduced in order to bring it within 
the earning limits, then the bondholders and stockholders must 
suffer this loss in just proportions. Frequently the stockholders 
are required to bear the entire shrinkage, upon the principal 
that to them belong all the gains if the enterprise is successful, 
and therefore they should be wilHng to stand the losses. The 
stockholders, or bondholders, as the case may be, pay in their 
assessments to aid in the continuation of the business and 
usually are given additional stock (preferred) or bonds to cover 
the amount of the assessment so that in case the company in 
future years should become prosperous, they may bring forward 
their claims for recognition and payment. 

To adjust the respective interests, the reorganization com- 
mittee may have recourse to the issuance of stock in several 
classes, some of the shares being preferred as to the payment of 

dividends, the remaining, or ^'^common," shares not 
Reorganization being entitled to participate until the preferred 

stock has received a certain percentage, which may 
or may not be cumulative.t Likewise there may be an issue of 
bonds, called ^"^income bonds/' upon which interest will be paid 



♦The roorffanization eommittoe consists of representatives of the cred- 
itors, stoclvholders and bondholders. 

tCnmulative dividends are such as, if not paid, are added to future 
dividends, and thns accumulate until they are paid. 



FOKECLOSURE. 317 

only in the event of its being earned. As in the case of dividends 
on preferred stock, the interest on such bonds may or may not be 
cumulative. 

If a proper proportion of the bondholders of a corporation, 
usually one-half, are not satisfied with the reorganization as 
outlined by the committee, or the amount or kind of new securi- 
ties to be given them for their assessment under the proposed 
plan, they may compel the trustees to begin foreclosure proceed- 
ings, and when the property is sold, bid it in and-take the property 
in payment of their debt. The usual method in such an event 
would be for the bondholders participating in this 
Foreclosure movement to form a new corporation provided 

with the necessary working capital so as to be 
ready to make repairs and put the property in good condition, 
and also to pay off the non-participating bondholders who would 
be entitled to their pro rata share of the price realized at the 
sale. This would leave out the stockholders entirely. The 
new company could then issue its own bonds free from all 
obligations of the former corporation. 

William W. Cook says: ^^The object of a reorganization is to 
avoid foreclosure. The prospect of 4 foreclosure is the cause of a 
reorganization. Frequently the reorganization is made after a 
foreclosure has been commenced, the object of the foreclosure 
being to cut off those persons who refuse to come into the reor- 
ganization. Sometimes the reorganization practically does away 
with the necessity of foreclosure, and this is the ideal condition 
towards which the times are tending.^' 

Frequently newly organized railroad companies and large 
corporations issue bonds upon their property and franchises, os- 
tensibly for the purpose of raising funds for extending and 
improving their existing property. These bonds, not being paid, 
at maturity, a foreclosure of the bond issue results. The prop- 
erty IB sold under foreclosure sale and a reorganization is had, 
usually by a new class of investors, the property and franchises 



318 CORPORATIONS, 



transferred to the new organization, and the original stockholders 
get nothing for their investment. This is a plan much favored 

by unscrupulous manipulators and organizers who 
Foreclosure ^^ ^^^^ manipulation acquire for themselves and 

their associates the amount originally paid in by 
the unsuspecting subscribing stockholders. Railroad and mining 
corporations especially have been the means of filching the pub- 
lic in general of enormous sums by this means. 



I 



I 



BONDS. 



CHAPTER XXXIY. 

GOVERNMENT AND CORPORATE OBLIGATIONS. 
KINDS; REFUNDING; NEGOTIATING; FORECLOSURE. 

A bond is an obligation or promise to pay money, which 
differs from a promissory note in that it is given under seal, the 
effect of which addition is, under the common law, that if default 
is made and payment has to be enforced by suit, the maker 
cannot plead want of consideration. 

When a government desires to borrow money the customary 
method of obtaining it is to print and offer its bonds for sale. 
These are issued in convenient denominations. In this country 
the most common denominations are $500 and 
Bonds"™^"^ $1,000, but sometimes, if the issue is what is called 
a popular one, designed for sale among people of 
small means, a portion of the issue is made in denominations of 
$100, or even less in some instances. 

In fixing the rate of interest which the bonds shall bear, the 
government should, and usually does, take into consideration the 
condition of the loan market (commonly designated as the money 
market), and the state of its own credit, and makes the rate the 
lowest one at which it can reasonably expect to sell the bonds at 
par. If sold below par, the government will pay, and the in- 
vestor will receive, more than the rate of interest named in the 
bond. The reverse is true if more than par is realized for the 
bonds. In general the nearer the selling price can be approxi- 
mated to par the more favorable will it be for the maker, in the 
long run. Although it is not possible for the government to tell 
what price the bonds will bring until they are placed upon the 

319 



320 BONDS. 

market and offered for sale^ it is usually possible to gauge this 
nearly enough for practical purposes. Stilly to guard against 
the contingency of unfavorable bids^ it is usual to reserve the 
right to reject any and all that may be submitted^ and if all are 
rejected, to make a new offering at a later datC;, with such changes 
as seem likely to yield a better result. 

The length of time the bonds are to run is also fixed by the 
government, a-nd is a factor in the price they will bring in the 
market. This is because investors prefer bonds having compara- 
tively long terms to run, which relieve them from the necessity 
of reinvesting at short intervals. Not infrequently bonds contain 
a clause giving the maker the option to call them in and pay 
them at any time after a specified date. This, while it enables the 
maker to retire them and stop the interest, usually causes them 
to sell at a lower price than if they ran for a fixed period, or, in 
other words, the maker, in consideration of the option of pre- 
payment, has to pay a higher rate of interest for that privilege. 

As a rule, government bonds are not secured, but depend 
wholly upon the credit and stability of the nation by which 
they are issued. In the case of some of the weaker nations, as 
for instance Spain and China, some issues have been secured by 
a specific pledge of the revenue arising from certain customs 
duties. This, however, is the exception and not the rule in the 
case of government bonds. At different times the United States 
government has issued bonds to relieve the needs of its treas- 
ury. Those issued during the Civil War bore six per cent., but 
the credit of the country is now so exceptionally high that it is 
able to float its bonds at the very low rate of two per cent., and 
its later issues have been at that rate. 

Eefunding consists in putting out a new issue of bonds to 
replace an old one, which may either have matured 
Refunding or which may be called for payment (the option 

having been reserved) in order to gain the ad- 
vantage of a lower rate of interest. Consolidated bonds or 



i 



STATE AND MUNICIPAL BONDS. 321 

^^consols'^ are those issued to refund several other issues, com- 
bining all into one. 

Coupon bonds are those which are made payable to bearer 
and the interest on which is evidenced by detachable coupons. 
Coupon and These coupons are torn off as they fall due, and 
Registered are usually collected through some bank. Regis- 

tered bonds are so called because the name of the 
owner is registered upon the books of the treasury department 
of the government issuing them. Sometimes the principal only 
is registered and the interest is evidenced by coupons, as in the 
case of bonds payable to bearer. This is the common practice 
in the case of bonds issued by private corporations. With gov- 
ernment bonds it is usual for the interest to be paid by 
check mailed to the owner's address. The advantage of regis- 
tration is that bonds of this kind, if lost or stolen, are of no 
value to the finder or the thief, and hence are very secure. 

In the United States the term government bonds, or ^^gov- 
ernments,^^ as they are called, is limited to bonds issued by 
the general government. State bond^, or bonds issued 
by the governments of the several states, are, however, 
also government bonds, and differ in no essential respect 
from those of the national government, except as to their 
legal basis. They rest on the credit of a part of the people in- 
state and stead of all the people taken together. This is 
Municipal truc also of municipal bonds, as those are called 
which are issued by counties, cities, towns, school 
districts, sanitary districts, or other public corporations. They 
are usually put forth for the purpose of raising funds for local 
improvements, such as the erection of public buildings, the 
building of bridges, or of water works, or of electric lighting 
plants. In many of the states municipal governments cannot 
issue bonds lav/fully in excess of a certain percentage upon the 
assessed valuation of taxable property in the municipality, and 
not then unless authorized by a majority vote of the people. 



322 BONDS. 

A generation ago it was common^ more especially in the 
middle west^ for municipalities to issue bonds to aid in the con- 
struction of railroads. The burden of the debts thus contracted 
bore heavily upon the people in many instances^ and suits were 
brought by the taxpayers to test their validity. As a result of a 
decision of the Supreme Court of the United States that these 
bonds must be paid, several of the States passed amendments 
to their constitutions prohibiting towns or cities from voting 
bond issues in aid of railroads. 

^^Voluntary contributions may be obtained from the citizens, 
but municipal bonds — bonds that must be paid by the city or 
county — can no longer be issued in those states/^ for aid to 
railroads. — Cook. 

Bonds issued by private corporations differ from those pre- 
viously mentioned, chiefly in that they are as a rule secured by 
mortgage on the property of the company issuing them. First 
feondsof mortgage bonds are those which are a first lien 

Private agaiust the property pledged for their payment, 

orporations gecoud and third mortgage bonds arr similarly 
secured by second and third liens. In case of foreclosure the 
first mortgage bonds must first be satisfied from the sale of 
the pledged property. Then if there is a surplus the second 
mortgage bonds can be paid, in full or in part, as the case may 
be, and so on. 

Income bonds are a peculiar class of obligations. They are 
usually secured by mortgage upon the property of the corpora- 
tion, but they bear interest only in the event that the net earn- 
ings of the company, after satisfying prior liens, are sufficient 
to pay it. Unlike ordinary mortgage bonds, they 
Income Bonds canuot be forccloscd for failure to pay interest 
unless the net earnings applicable thereto should 
be willfully diverted and applied to other purposes. Interest on 
bonds of this class must, however, be paid out of the earnings 
before any distribution of profits in the way of dividends can 
be made to the stockholders of the company. 



BOND ISSUES. 823 

Mortgage bonds may be secured upon lands^ buildings^ manu- 
facturing plants, telephone and telegraph systems, street car 
lines, franchises, toll roads, bridges, railroad rights of way and 
equipment — in short, upon tangible property of all 
Bonds^^^°^ kinds. Sometimes the bonds are designated ac- 
cording to the nature of the security, as for ex- 
ample, termina/l bonds, which are bonds issued by railroad com- 
panies upon the security of the valuable lands used for stations 
and office buildings and for switch and storage yards, etc., in 
the cities where their lines terminate. 

Collateral trust bonds are bonds issued by a corporation and 
secured by bonds or other securities owned by it and deposited 
with a trust company, or, it may be, in the hands of individual 
trustees, though the former is more usual. This form of bond 
is sometimes resorted to by corporations owning bonds of other 
corporations, which they do not wish to sell, or which they may 
not be able to market without their guaranty. It is most fre- 
quently used by corporations that make real estate mortgage 
loans, which they pledge as security for their own bonds bear- 
ing a lower rate of interest. 

Debentures are unsecured bonds, and are a comparatively rare 
form of obligation for private corporations, owing to the diffi- 
culty of placing them on favorable terms. 

Of many methods adopted to float a bond issue, the most 
usual is to enlist the services of one or more of the banking 
houses, trust companies, investment companies or firms making 
a specialty of dealing in such securities. In the case of a 
private corporation the officers are required to 
Bo°nd liue make a full and explicit statement of its affairs, 

its assets and liabilities, its earnings past, present 
and prospective, the amount of the proposed bond issue, an 
exact description of the property to be covered by the mort- 
gage, and any other facts which may be relevant or which the 
dealers may require. If the showing appears favorable the appli- 



824 BONDS. 

cant is informed that if npon thorough investigation the facts 
prove to be as stated and everything is found satisfactory the 
bonds will be negotiated. The bond dealers then detail their 
own representatives or agents to make the investigation^ which 
is made in the most thorough and careful manner, and includes 
a searching inquiry into the character and standing of the offi- 
cers and directors of the company making the application, its 
credit and business connections. Even when these are well 
known it is usual to revise previous information and make sure 
that it is in all respects up to date. The expense of the investiga- 
tion falls upon the applicant, which may be required to make a 
deposit in advance, of a sum estimated as sufficient to meet the 
cost. Appraisers are employed to estimate the value of the 
property, and expert accountants are set to work to examine the 
company^s books. In short, every available means is used to as- 
certain its true condition. The dealers also employ special counsel 
to report upon the legal status of the applicant, whether it is 
conducting its business clearly within the limits of its charter, 
whether it holds indefeasible title to its property, etc., and to 
see that all the formalities required by law are complied with 
when the bonds are issued. The result of all these investigations 
being found satisfactory, the next step is the execution of the 
mortgage, which is usually made in the form of a deed of trust to 
some trust company. Then the bonds are issued and may be 
offered for sale. Sometimes the dealers sell them on commission, 
and sometimes they buy them outright. In the latter case, if 
the issue is a large one, they may form a syndicate, or special 
partnership arrangement by which several dealers contribute the 
necessary capital and share in the profits of the transaction. 
Individual purchasers of bonds run less risk in buying those that 
are thus placed on the market by some house of established 
reputation, because as the company or firm that finances the 
issue usually invests its own or borrowed capital in the bonds 
until they can be sold, they can rely upon all the precautions 



FORECLOSURE. 326 

mentioned having been taken by the dealers for their own pro- 
tection. 

It is customary to include in the deed of trust securing a 
bond issue a clause providing that if the interest is not paid 
promptly as it matures^ the entire amount of principal and inter- 
est may^ at the option of the bondholders^, after default has 
continued for a certain number of days^ ^^become immediately 
due and payable.^^ To prevent one or two holders of small lots 
of bonds exercising such option in derogation of the interest of 
the holders of a majority of the issue^ holders of some specified 
proportion of the issue are usually required^ under the provisions 
of the trust deed^ to unite in requesting the trustee to institute 
foreclosure proceedings before such action is be- 
Foreciosure gun. Forcclosurc having been decided upon^ the 

trust company files a bill in the proper courts al- 
leging the default and praying that it be allowed to sell the 
pledged property in satisfaction of the debt. In the majority of 
cases the bondholders file a bill at the same time^ asking that a 
receiver be appointed to take charge of the affairs of the company 
and conserve its assets for the benefit of all concerned. Not in- 
frequently such action is taken by the stockholders before the 
bondholders have had time to act. If there is opposition^ the 
court as a rule refers the case to a master in chancery, who^ as 
an officer of the court;, takes testimony and makes a report to 
the court, whereupon, if the report sustains the allegations in the 
bill, a receiver is appointed. 

The receiver is also an officer of the court and makes reports 
thereto as often as may be required. Should the foreclosure 
proceed to a sale and all of the property of the company be 
swept away his functions thereupon cease. It often happens, 
however, in the case of railroads or other large corporations, 
that the bondholders do not wish to bid in the property at the 
sale and assume the conduct of the business, nor do they wish 
to run the risk that no other bid will be sufficient to pay the 



326 BONDS. 

debt. And it may also be the ease that holdings of bonds and 
stocks are such that the interests of the respective owners are 
complicated. Furthermore it may appear possi- 
Reorganization blc to conserve the interest of all concerned, stock- 
holders as well as bondholders, by postponing 
the foreclosure sale, which lies within the discretion of the bond- 
holders, and endeavoring to effect a reorganization of the com- 
pany upon a basis which will enable it to continue its business 
and give both the bondholders and the stockholders new and 
marketable securities in place of those previously held. 

Reorganizations are customarily effected through the medium 
of committees composed of bankers or others skilled in finance, 
who represent the various interests and endeavor to formulate a 
plan which shall be acceptable to all. The first task of a reor- 
ganization committee is to get authority from the bondholders and 
stockholders to represent them, which is no small undertaking 
in the case of a corporation the bonds and stocks of which are 
widely scattered, in Europe it may be as well as in this country. 

Although the procedure is called reorganization, the cus- 
tomary m.ethod is to form a new company which bids in the 
property of the old organization at the foreclosure sale; and then 
issues its own bonds and stocks against the same and such new 
capital as may have been provided. In this way the interest of 
stockholders and bondholders who do not participate in the reor- 
ganization is eliminated. Non-participating bondholders get only 
such percentage of the proceeds of the sale as their bonds bear to I 
the total issue, and as there are very likely no other bidders aside | 
from the reorganized company it is usually enabled to make a I 
low bid. Non-participating stockholders of course get nothing. f 
Sometimes, however, when circumstances appear to justify it, * 
and their holdings are small, non-participants are permitted to 
join the new organization after the sale on payment of a sum 
exacted as a '^penalty." ^ 

Many reorganizations of American railroads are the conse- ^ 

» 



REORGANIZATION. 32? 

qnence of the vicious system of financing employed at the time 
they were constructed. Too often the bond issue was made 
large enough to pay the entire cost of construction and equip- 
ment and also a handsome profit for the promoters, the stock 
being either retained by the promoters or given as a bonus to 
help the sale of the bonds which could not otherwise be mar- 
keted. If the road could be made to earn the interest on the 
excessive issue, well and good; if not, then disaster must follow, 
sooner or later. 



SECURITIES AND INVESTMENTS. 



CHAPTER XXXV. 



BONDS, STOCKS AND MORTGAGES. 

GOVERNMENTS; STATE AND MUNICIPAL; KINDS OP MORTGAGE 

SECURITIES. 

By the term securities we usually mean stocks or bonds of 
corporations^ either public or private, and mortgages upon real 
estate. These are evidences of property, and in the eyes of the 
law are regarded as personal property. Being negotiable or as- 
signable by mere delivery, and readily convertible, they are 
extensively used as collateral security for loans and other con- 
tracts, and have gradually taken the name of se- 
Definition curitics. The value of any security depends upon 

the character of the property which it represents, 
and the rate of income which it is reasonably certain to produce. 
The more secure the investment is regarded, the higher its 
market price is apt to be, and therefore the lower the rate of 
income which it yields. Investors who are willing to assume 
risks are comparatively few, and those who wish to be certain 
of the return of their capital are satisfied with smaller dividends. 
United States government bonds may be classed as the high- 
est order of securities before the public. Our faith in the in- 
tegrity and stability of the government is such that we do not 
hesitate to invest in its bonds at very low rates of interest.* 
During the great Civil War our government issued 
Governments large amouuts of bouds for war purposes, but the 
amount has been gradually reduced, by payment 



♦The lowest rate which any of the government bond Issues draw is 2 
per cent. 

328 



il 



STATE OBLIGATIONS. 329 

of the public debt^ and the rate of interest lowered, while the 
price has advanced until they are no longer a profitable class 
of investments. The national banks now absorb a large portion 
of our government bonds in compliance with the National Bank- 
ing Law. The remainder of them are mostly taken as invest- 
ments for trust and other funds where safety and facility of con- 
version are greater considerations than a high rate of interest. 
They are considered absolutely safe and always marketable. 

State and municipal bonds are in some instances high class 
securities^ and in others of a very low grade. Unfortunately 
many of the states have not preserved their credit in financial 
markets. Swayed by popular impulse, they have, in times of 
stress been led into the suicidal error of repudiating their just 
obligations. A lack of patriotism and state pride combined with 
a knowledge of the fact that a ^^state cannot be sued^' has in 
several instances resulted in dishonest legislation. Even where 
bonds have been issued with an honest purpose, there have come 
Unreliability political disturbances leading to a revulsion of 
of state sentiment, or affording an opportunity to dema- 

igations gogues to assail public creditors and perhaps se- 

cure a majority of votes against the payment of just debts.* For 
these reasons, state securities are not usually regarded favorably 
by investors. 

"Whoever buys the paper of a state should do so with the 
distinct understanding that he has nothing but its honor to 
rely upon, unless the commercial relations of its citizens should 
be of such a character as to make its financial credit important 
to their business interests. There is for that reason little like- 
lihood of such states as New York and Massachusetts ever repu- 
diating their obligations.^' These states contain the two great- 
est money centers of the country, and being the chief lenders, 
they could not afford to set an example of repudiation to other 

♦Twelve states of the union have broken faith with their creditors at 
different times, and either openly repudiated or ignored their outstanding 
obligations in whole or in part. 



380 SECURITIES AND INVESTMENTS. 

states. What has been said in regard to the uncertain value of 
state securities applies to some extent to county, town and 
municipal obligations. The same people compose the state and 
the local organization, and the same moral sentiments exist con- 
cerning both obligations. There is this important distinction, 
however, that municipal obligations can be enforced in the courts, 

provided they are properly created. There are 
securities many points which go to determine the value and 

reliability of municipal securities. The first of 
these is the legality of issue. If the bonds have been in litiga- 
tion their legal status has probably been fixed by the courts, 
but unless this is the case, their legality should be investigated by 
a competent lawyer. Besides the legal points involved and the 
disposition of the municipality to pay, there is also the question 
of its ability to meet its obligations. The laws in many of the 
states limit the power of municipalities to issue bonds to a 
small percentage of the taxable property,* thus aiming to pro- 
tect both creditors and taxpayers, but since the bonds must be 
paid out of the taxes, and taxes are dependent upon the value 
of property, it follows that the payment of a bond issue is con- 
tingent upon the general prosperity of the town or business 
community. As our cities and other municipalities grow in 
wealth and population, they become better able to meet outstand- 
ing obligations, especially where bond issues have not kept pace 
with population, and hence the tendency of this class of securi- 
ties is to gradually improve in the estimation of investors. One 
disadvantage in the case of bonds issued by small municipalities 
is that not being widely known the market for them is a limited 
one. This makes them to some extent undesirable investments, 
except for people who do not regard ready negotiability as im- ■ 
portant. With such investors they are favorite securities. The 
bonds of some of the larger cities are only slightly less esteemed 
than those issued by the general government. 

♦In IHlnois the limit is 5 per cent. 



LOCAL SECURITIES. 331 

Leaving now the consideration of the securities of public 
corporations, we come to that larger class of mortgage securities 
based upon private property, either corporate or individual. 
Mortgage securities may be divided into two general classes, 
one of which is based upon the actual value of the property 
mortgaged and the other upon the earning power of the property. 
Thus when a man loans money and takes as security a mortgage 
upon the house and land of the borrower, he estimates the actual 

value of the house and land. He does not wish to 
securitfe^s bccomc in effect a partner with the mortgagor by 

making the repayment of the loan dependent 
wholly upon the borrower's success in business. He wishes the 
- security to repay the loan in case the borro^ver fails to pay; 
hence if he is prudent he loans but one-half or two-thirds of 
the actual value of the security, so as to leave abundant margin 
for shrinkage in case of forced sale. But suppose he loans to a 
corporation — say a railroad company — by purchasing its bonds, 
he depends for the security of his money not upon the property 
as such, consisting of road-bed, depot buildings, etc., but upon 
the business success of the road. If the road does a profitable 
business the bonds are safe, otherwise not. There is not a rail- 
road in the United States that would sell for its bonded in- 
debtedness in case its business was to cease. The rails and ties 
would be worthless except as old iron and wood, and the right 
of way could be sold to neighboring farmers at only a small 
price. Considered simply as real estate, the entire property 
of a railroad company would be worth but a small fraction of its 
bonded indebtedness. The value of the bonds, then, is sustained 
by the profits or income from the property. From this another 
reason is apparent why when a railway company becomes finan- 
cially embarrassed the courts appoint a receiver to take charge 
of and run the road, pending a settlement with the creditors. 
To stop the operation of the road would be to vastly depreciate? 
if not ruin and destroy the property. The investor, therefore. 



332 SECURITIES AND INVESTMENTS. 

who contemplates the purchase of railway securities should con- 
sider well the present and future earnings of the corporation. 
If its earning capacity for any reason becomes seriously im- 
paired^ nothing can save the bondholders from loss. And yet 
railroads are such a necessity to our civilized life^ and their 
traffic so dependent upon our industrial system that their income 
can be made the basis for borrowing money as safely as can a 
dwelling-house. 

It is apparent from the foregoing that the desirability of 
railroad bonds as an investment is dependent upon two con- 
ditions, viz.: With old, established roads these two factors in 
the problem can be easily ascertained, but with new roads the 
question of earnings can only be surmised, and if the>manage- 
ment of the company is defective, or the earnings 
other Bonds ^^^ Overestimated the result is likely to be a re- 
ceivership and reorganization, with all of their dis- 
astrous consequences to investors. In the case of street railroads, 
telephone systems, water and gas works, the franchise is usually 
a valuable asset which will support a considerable bond issue, 
especially when it has many years to run. On the other hand, 
the danger of competition is always a menace to the income 
of a corporation unless it has an absolute monopoly. Thus gas 
and electric companies are competitors and the profits from each 
may be correspondingly reduced. 

The value of the security afforded by bonds of ordinary com- 
mercial and manufacturing corporations must be estimated 
wholly upon the merits of each individual case. Each interest 
must be investigated in all its bearings in order to reach a * 
wise decision, while competition, management and public re- 
quirements are important factors which should be carefully 
considered by the investor before placing his money. 

There are many uncertainties that threaten stocks which do 
not appertain to bonds. The latter are secured upon the prop- 
erty or earnings of the corporation, and are fixed and determined, 



STOCKS. 333 

but the value of stocks rests largely upon the earning power and 
the management of the corporation and also the future condi- 
tions under which the company may conduct its 
stocks business. The investor in stocks should, there- 

fore, anticipate the future and weigh the proba- 
bilities of business success. A business which is successful 
to-day may be run at a loss next year or compelled to close down 
entirely. Competition is constantly shifting and must be met 
in a variety of forms. New inventions and labor saving processes 
may give a temporary advantage to those who discover or secure 
them first, and reduce the dividends of companies which were 
prosperous before. The telephone competes with the telegraph, 
and the trolley car cuts into the suburban trafl&c of steam rail- 
roads. Lines of business which yield large returns especially in- 
vite competition, and as a result the business may become over- 
done and profits entirely disappear. The stock of companies 
formed to use or promote new and useful inventions is frequently 
the most profitable and where a monopoly is thus secured for a 
time, large fortunes have been made. Late investors in such 
stock, however, are very likely not to fare so well. Every hour 
shortens the life of a trade monopoly. Among the safest stocks 
are those of well managed banks and insurance companies. The 
states exercise a supervision over these companies, and their 
shares can generally be relied upon as representing actual cash 
investments, especially in those states where the laws are strict 
concerning such corporations and the general administration of 
law is considered good. In the case of banks, however, the 
stockholder often incurs the risk of liability to creditors to the 
extent of the face value of his stock, in the event of the bank 
becoming insolvent. 

Mortgages on real estate are considered a desirable class of 
securities, especially when the mortgage represents not more than 
one-half the actual market value of the property, and where the 
property is located in a prosperous and growing community. 



334 SECURITIES AND INVESTMENTS. 

Many insurance companies and savings banks decline to loan 
upon wooden houses^ confining their investments to securities 
upon either stone or brick improvements for the 
Mort^ges^ Tcasou that thcsc are less liable to deteriorate by 

the ravages of time or to be destroyed by fire. 
Other investors prefer mortgages upon residence property upon 
the theory that a man will protect his home from foreclosure 
when he would not other property. Unless there is a decided 
advance in the value of land in the vicinity of the property 
mortgaged, the mortgagor should aim to reduce the amount 
of the mortgage at maturity by making a part payment at least, 
since property naturally deteriorates with time, and at the end 
of three or five years the property may not be as good security 
for the debt as it was originally. 

Eeal estate mortgage notes are usually made payable to the 
order of the maker and are then endorsed by him in blank. 
This makes the security transferable by mere delivery, and hence 
the holder of a mortgage may sell it, and an investor purchase it, 
the same as any other chattel. The buyer must of course, exer- 
cise good judgment and proper care to see that the security is 
sufficient and the character of the property satisfactory before 
investing. By trusting to representations of brokers in regard 
to these vital points, instead of making a personal investigation, 
investors have been known to find later on that their money 
was paid for a comparatively worthless security. 

As the country becomes more densely populated, and the un- 
occupied lands of the West are taken up, the farm lands in the 
great Mississippi Valley become more valuable and prices tend 
to advance. Mortgages upon good, productive farms in the 
central west are therefore growing in popularity 
Mortgages ^^^ morc and more absorbing the capital of in- 

vestors. Paper resting upon landed security in 
the newer and rapidly developing sections of the West, where 
farming is uniformly successful is almost sure to be good. But 



MORTGAGES. 335 

like city mortgages farm securities must be carefully investigated 
or disaster may result. There have been mortgage companies 
located in western cities whose business consisted in making 
loans on farms and selling the securities to eastern investors. In 
some instances these companies guaranteed the paper. But 
as the loan company used the same money over and over again 
to make the loans^ it is apparent that their guaranties would 
soon exceed the amount of their capital and hence become prac- 
tically worthless. One objection to farm loans is the uncertainty 
of payment of interest in case of a crop failure. What an in- 
vestor wants is not only safety of principal^ but regularity as to 
payment of interest. A locality where there is a diversity of 
crops is preferable for desirable mortgages^ since in case there 
should be a failure of one crop, the mortgagor may yet be able 
to pay his interest from other products. Where a single crop is 
depended upon, or the land is situated so that it is subject to 
overflow, resulting in an occasional total failure of crop, the 
mortgagor may be compelled to default in the interest perhaps 
for a year. 

Then again, investors would do well always to consider the 
disposition and ability of debtors to pay. No matter how good 
the security, the mortgagor's credit has an important bearing 
upon the value of his paper as security for money 
to PaT*^°" loaned or invested. Where public officials repudi- 

ate their just obligations and the laws are framed 
in the interest of the debtor class, investors may well beware. 
As previously noticed, several of our states have openly violated 
their obligations, and hostile laws have been passed against 
capital by both state and municipal governments. It can hardly 
be expected that private citizens will prove to be shining ex- 
amples of integrity when those in authority above them are 
thus derelict. Investors, therefore^ aim to avoid such localities. 



COMMERCIAL CREDITS. 



CHAPTER XXXVI. 

OUR CREDIT SYSTEM. 
ASSETS; LOSSES; LIMIT OF CREDIT; MACHINERY OP CREDIT. 

The wonderful commercial progress and development of this 
country during the past century has astonished the old world and 
amazed even ourselves. In looking about for the moving causes 
which have produced this great result, we must ascribe a large 
part to our credit system, extending as it does, to every nook and 
corner of the land. In no country in the world is credit so easily 
obtained and so extensively used as in the United States. Capital 
goes out freely and willingly and takes its chances in all manner 
of enterprises, so long as they offer fair prospects of returns on 
the investment. Thus the American people are educated in the 
use of credit, and have learned to depend upon it, until it has 

become closely interwoven with our commercial 
System ^ systcm. In European countries credit is more or 

less restricted. In Italy and Spain little credit is 
extended, and accordingly we see a languishing commerce. In 
Western Europe it is more widely used and commerce shows 
corresponding vigor and activity. The use of credit is not alone 
confined to the purchase or sale of goods on time or borrowing 
or lending money, but extends to innumerable acts of trust and 
confidence by which the machinery of the business world is 
kept in successful operation. A borrows money at his bank 
and the amount is placed to his credit. He owes B and gives a 
check in payment. The check is deposited in B's bank and 
passes through the clearing house, where it is offset by some 
other check of like amount, and as a result the credit is trans- 

336 



II 



II 



CREDITS. 337 

ferred from the account of A to that of B. No money or actual 
cash is handled in the transaction, but merely a transfer of 
credit. It is one incident in our credit system. Our clearing 
houses, stock exchanges and produce markets are all conducted 
on the same principle — one debt being set off against another, 
and a small percentage of the transaction actually liquidated in 
cash. All of our large corporations and their gigantic oper- 
ations of both a public and private character are possible only 
through the medium of our credit system. Our whole com- 
mercial fabric rests upon it. 

Since our credit system forms such an important factor in 
the problem of business management, it becomes necessary to 
imderstand and carefully use it. Losses are imperative under a 
credit system, and the aim must be to more than recoup for the 
loss by an increased volume of business. Losses in business 
are largely the result of carelessness, inexperience and a lack 
of proper system and discipline on the part of business men, or 
a lack of knowledge and judgment in giving credit. 
in°e^vkabie ^^ experienced credit man is responsible for the 

assertion that ^Sve have only to take the average 
business house for the last twenty years and figure up the 
losses sustained by it and compare the sum total, plus com- 
pound interest, w^ith its present financial status, and we shall 
find that it has lost more than the capital accumulated during 
the period.'^ 

A lack of a prompt and effective credit department where col- 
lections are looked after carefully and thoroughly, is sure to re- 
sult in a stream of losses to the house, with possible failure in 
the end. So extensive has the use of credit become that large 
commercial houses have legal departments in connection with 
their credit departments kept busy with the collection of ac- 
counts of delinquent customers. Often the most energetic action 
is necessary to obtain assets in advance of the sheriff or assignee. 

From Dun's Eeview, Ifew York, we have the following: 



COMMERCIAL CREDITS. 



TABLE OF FAILUEES 


IN" THE UNITED STATES, 






1891 TO 1901. 






Year. 
1892., 


Number of 

Concerns 

in Business. 

. . 1,172,705 


Number 

of 
Failures. 

10,344 


Amount 

of 

Liabilities. 

114,044,167 


Average 
Liabili- 
ties. 

11,025 


Proportion 

of 
Failures. 

1 in 113 


1893.. 


. . 1,193,113 


15,242 


346,779,889 


22,751 


1 in 78 


1894. . 


. . 1,114,174 


13,885 


172,992,856 


12,458 


1 in 80 


1895.. 


, . 1,209,282 


13,197 


173,196,060 


13,124 


1 in 92 


1896.. 


.. 1,151,579 


15,088 


226,096,834 


14,992 


1 in 76 


1897.. 


. . 1,058,521 


13,351 


154,332,071 


11,559 


1 in 79 


1898., 


. . 1,105,830 


12,186 


130,662,899 


10,722 


1 in 90 


1899.. 


, . 1,147,595 


9,337 


90,879,889 


9,733 


1 in 123 


1900. . 


. . 1,174,300 


10,774 


138,495,673 


12,854 


1 in 108 


1901.. 


. . 1,219,242 


11,002 


113,092,376 


10,279 


1 in 111 



Average 1,154,634 12,440 166,057,271 12,949 1 in 95 
The period of time covered by this table includes the year of 
panic, 1893, and the depression which followed, as well as the 
years of prosperity at the latter part of the table, and may thus 
be taken as fairly representative of the average working of our 
credit system. Out of 1,154,634 mercantile and manufacturing 
firms, corporations and individuals doing business during the 
period, as shown by the table, 12,440 failed, or one in every 
ninety-five. Innumerable petty failures consisting of thoso 
whose capital is too small for a rating, are not included in these 
figures. The average total liabilities of the concerns failing are, 
in round numbers, $166,000,000. This is not a total loss, as a 
portion will eventually be paid. We may safely assume that 
not more than thirty per cent, will be paid, leaving a net loss 
to creditors of about $116,000,000 in each year. This makes 

no account of the injury to trade consequent upon 
As^^s^^^^*^ having such a large amount of assets tied up in 

litigation or pending settlement. Since thirty per 
cent, of the liabilities are realized in cash, after the expenses 
of conversion of the assets, shrinkage, etc., it follows that the 



LOSSES. 339 

assets of the firms whose failures amount to $166,000^000, 
as above stated, probably amounted to one-half or two-thirds the 
liabilities, or, say, eighty to one hundred millions. The per- 
centage of loss can only be ascertained by knowing the amount 
of business done. Business houses usually compute the rate of 
loss upon the volume of business transacted and not upon the 
amount of their capital, and since the capital of a concern is 
usually turned over several times in a year, the volume of busi- 
ness may be four or five times the capital invested. Without 
knowing the volume of business done, or the capital invested in 
mercantile and manufacturing enterprises, it is, therefore, im- 
possible to arrive at the percentage of losses under our credit 
system, but it is apparent that, beneficial as the system is, we 
are doing a large amount of business not only for no profit, but 
at a loss of capital. It is true that within certain limits the 
merchant adds his percentage of losses to his selling prices, 
and thus the customer who pays makes good the loss occasioned 
by those who do not pay, but competition is constantly tending 
to keep prices uniform, and the merchant who makes the least 
of bad debts comes the nearest to a successful career, provided 
the volume of his business is not restricted by too much caution. 
To what extent credit may be extended to a buyer in any 
given case is a problem depending upon a combination of 
factors. Outside of the capital invested, assets and liabilities, 
is the character of the individual, the conditions surrounding 
his enterprise which make it a success or failure, his experience, 
etc., all of which must be carefully weighed by the credit man 
before arriving at a decision. Mr. P. E. Earling, in his book 
entitled ^^Whom to Trust," says: ^^On the supposition, justified 

by experience, that the assets of a mercantile firm, 
Limit of Credit in the cvcut of foreclosurc or assignee's sale, do 

not bring over 65 per cent., the limit of credit, to 
insure us dollar for dollar, must be fixed at 65 per cent, of the 
inventory of the assets. In the case we have assumed, $10,000 



340 COMMERCIAL CREDITS. 

assets would pay liabilities of $6^500^ and this amount must be 
established as the limits and in all cases this relative proportion 
should be maintained/^ 

The nature of the assets should be considered, however, as 
this may vary the amount of shrinkage greatly. If the assets 
consist largely of staple merchandise and secured notes or ac- 
counts, the shrinkage may be comparatively small, especially if 
the market for such goods or products is an advancing one. 
On the other hand, old goods and stale accounts are subject to a 
fearful shrinkage when an attempt is made to convert them into 
cash. 

Written and signed statements of assets and liabilities are 
now exacted of customers applying for any considerable amount 
of credit, by wholesale houses and banks, thus placing the 
facts in such form that in cases of misrepresentation the person 
signing the statement may be punished for fraud in "obtaining 
goods by false pretenses.^^ Buyers may intend to be honest in 
their statements, but are frequently optimistic and inclined to 
overestimate their resources and ability to pay. The written 
statement tends to reduce the problem of "facts and figures,'^ 
and dispel illusions. It is also customary to re- 
statements quest references in order to ascertain how a firm 
stands in the estimation of others, but these are 
of much or little value, according to the motive of the writers. 
A jealous desire to injure a rival may cause an unfavorable 
report, or a disinclination to injure a friend may be the motive 
for a half favorable reply concerning an undesirable customer. 
Banks are constantly asked concerning the financial standing of 
their customers, but it should be remembered that a man often 
keeps faith with his banker when he stands poorly elsewhere, 
and thus the banker^s opinion may not be accurate. 

Commercial agencies greatly facilitate credits by furnishing 
information concerning the financial status of business firms 
and individuals. This information is collected in a variety of 



i 



I 



LIMIT OF CREDIT. 341 

ways^ by special reporters^ lawyers and others^ and supplied 
confidentially to subscribers. In this era of extensive and varied 
uses of the credit system, a systematic method of collecting 
information concerning firms and furnishing it to those who are 
properly entitled to receive it, is of immense advantage. In 
addition to quarterly and semi-annually revised reference books 
the mercantile agencies undertake to furnish their 
Agencies ^ subscribcrs with special reports, consisting of de- 

tailed statements of facts concerning the financial 
status of every dealer of any consequence in the country. The 
mercantile agency also takes cognizance of mortgages, judg- 
ments and transfers of property upon the county records, and 
preserves the facts concerning them upon the agency's records. 
They endeavor to get ^^Signed Statements'' of assets and liabili- 
ties from the debtor class whenever possible, and thus a mer- 
cantile report, made up from a variety of sources, is of great 
advantage to every dispenser of credit, especially as the courts 
have held that under certain circumstances a statement fur- 
nished a mercantile agency is as binding on the maker as if 
furnished a creditor direct. The reliability of these reports 
cannot always be depended upon strictly, but the prosperity 
of the companies engaged in that field of research is an evidence 
that the public has confidence in them. 

The facts gathered by the mercantile agencies* are not pub- 
lic property, but are furnished under restrictions to sub- 
scribers to the agency only. It has been decided by the courts 
that the agencies are not responsible for inaccuracies of their 
statements, nor can they be prosecuted for libel on account of 
furnishing facts which may prove damaging to the business 
standing of a dealer. These institutions aim to verify all im- 
portant facts before sending them out, and since no malice can 
be shown, in case of error, there is little room for litigation. The 



*The principal mercantile agencies are R. G. Dun & Co. and Bradstreet's, 
although there are a number of lesser importance. 



M2 COMMERCIAL CREDITS. 

commercial agency is ever on the alert for every item of informa- 
tion whicli would seriously affect in an injurious way, the credit 

or financial standing of a dealer. The recording of 
Repons^^° a chati*el mortgage, confession of a judgment, 

sale or other transfer of property, are noted, 
and in the case of an absconding debtor his whereabouts 
is frequently disclosed by the reporter or correspondent of the 
mercantile agency. 

In addition to the mercantile agencies we have credit asso- 
ciations in many of the different lines of trade, in which a large 
number of tlie firms and dealers are banded together for mutual 
protection. A bureau is created and the information required 
by members obtained by a clerk employed by the bureau. The 
main object of these associations is mutual aid in the matter of 

credits. Buyers who fail to meet their bills are 
Associations prevented from obtaining credit from other houses, 

by having their past record brought to the atten- 
tion of all members of the association, and thus by a variety of 
means, business firms aim to guard the expansion of credit, and 
permit its proper and conservative use. 

The laws with reference to the collection of debts in dif- 
ferent localities must also be considered when extending credit. 
In some states the laws are framed in a manner decidedly favor- 
able to the debtor class. The exemptions are large enough to 
shield several thousand dollars worth of property, and the "laws 

delays'' are more than necessarily numerous. Es- 
LaJs '°" pecially in the western frontier states where it is 

perhaps intended to attract settlers by favorable 
laws, thus giving the pioneer an advantage to offset the hard- 
ships which he must undergo, in opening up a new region, do 
we find the laws most favorable to the debtor. In the eastern 
and more populous states the laws are more equitable and judg- 
ment and execution can be more quickly obtained. Every suc- 
cessful credit man must be conversant to a limited extent, at 
least, with the laws of the states in which he does business. 



CREDIT ASSOCIATIONS. 348 

In extending credit to a co-partnership some factors enter 
into the problem which do not appear in the case of a single 
individual. In order that a partnership may be successful in 
business it is essential that the different members of the firm 
should be harmonious in their ideas and actions. Discord is 
sure to lead to trouble and probable failure, or 
Partnership dissolutiou. "A housc divided against itself can- 

not stand.^^ The credit of an inharmonious co- 
partnership must necessarily be rated low, and the credit man 
must decide whether the partnership is one which combines the 
elements of success, and whether the firm is stronger or weaker 
than its individual members. It is an old adage in business life 
that one would do well to "avoid unfortunate men in your busi- 
ness affairs/' If a firm is composed of several partners one of 
whom has hitherto been unsuccessful it diminishes the credit of 
the firm, ^\e may sympathize with "an unfortunate man'' but 
hesitate to credit him. 

Corporations have their advantages and their disadvantages. 
One of the latter is met with in obtaining credit. For old and 
well known houses whose credit is established, to incorporate 
in order to facilitate management of the business or the transfer 
of interests therein, is perfectly proper and wise, but in the case 
of new enterprises, the corporation labors under 
Corporations a decided disadvantage. The partners of a firm are 
severally liable for all debts of the firm to the 
fullest extent. They are bound during a lifetime, or until re- 
leased by the statute of limitations, to pay the firm debts, but 
with a corporation, each shareholder is liable only to the amount 
of his stock.* Failure of the company cannot involve him beyond 
this. It is this feature, the non-liability of the individual mem- 



*Each shareholder is liable only to the amount of the par value of his 
stock, in most of the states, and cannot be proceeded against for corporate 
liabilities except in case the shares have not been fully paid, in which 
event the unpaid portion is collectible at law. In Ohio and a few other 
states shareholdeis are liable to twice the par value of their stock. 



344 COMMERCIAL CREDITS. 

bers of the company^ which makes the credit rating of a cor- 
poration lower than a partnership under the same conditions. 
There is no individual character in a corporation upon which 
credit may be based. It has no moral status. It is a "souUess^^ 
creature of the law^ limited and bound by legal enactments. 
As a consequence it is entitled to a lower credit rating than 
a partnership. Banks and credit men frequently require the 
personal signature of a responsible officer of the company as a 
guaranty of its obligations. 



1 



PURCHASE AND SALE OF REAL 
ESTATE. 



CHAPTEE XXXVII. 

LANDED PROPERTY. 

TITLES; VALUES; NINETY-NINE YEAR LEASES; MORTGAGES. 

Private ownership in land is a recognized right among all 
civilized governments and people. Titles are derived originally 
from the government,* which continues to be the paramount 
owner of the land under the doctrine of eminent domain, and 
which holds title to all unclaimed and undeveloped lands. The 
title to the lands in the United States was acquired from Great 
Britain by the treaty of peace, from France, Spain and other 
countries by either purchase or conquest. The title of the 
European nations to this immense territorial domain, which 
passed to the United States was founded upon their discovery 
and conquest. By the customary European law of nations 
discovery gave title to the soil subject to the right of occupancy 

by the natives. The United States, therefore, de- 
Tities rived its title to all the lands within our borders, 

subject to the right of occupancy or use by the 
Indians. The millions of square miles of our vast undeveloped 
plains and forests were called government lands and this land 
the Government has parceled out and sold at the minimum price 
of $1.25 per acre, or donated to individuals or corporations for 
various considerations. t The ^^chain of title'^ then begins with 



♦In a monarchical government they are derived from the king. 

tUnder the homestead law of 1862 a settler was permitted to acquire 
title to 160 acres of Government land gratis under certain restrictions by- 
cultivating it five years. 

345 



346 PURCHASE AND SALE OF REAL ESTATE. 

the Government and runs down through the various holders 
who have taken it either through purchase or descent, to the 
present holder in fee simple, or claimant of the land. 

The ownership of real property "in fee simple'^ excludes all 
qualifications and restrictions as to the persons who may inherit 
it as heirs, thus distinguishing it from a "fee tail/^ It is the 
largest possible estate a man can have, being absolute in per- 
petuity. It is where lands are given to a man and to his heirs 
absolutely without any restrictions or limitations put upon the 
estate. The word "simple" in the compound word "fee-simple'^ 
adds no meaning to the word "fee'' standing by itself. The 
"fee tail" is an inheritable estate which can descend to certain 
classes of heirs only. It is necessary that they should be "heirs 
of the body" or "blood heirs." The theory of a "fee tail" estate 
was derived from the old Eoman system restricting estates. 

Having extinguished the Indian title by treaty or otherwise, 
the next step was to survey the land into ranges, townships and 
sections by means of lines running north and south, and east and 
west, but not including navigable streams or any land especially 
reserved, such as Indian Eeservations and National Parks. 
Townships are six miles square and contain thirty- 
Surveys six sections of six hundred and forty acres, each 
section being one mile square. These sections 
are divided into halves, quarters and eighths. The ranges, 
townships and sections are numbered in regular order, and hence 
by knowing the number of each we have a brief and accurate 
description of the tract. Salt springs and lead mines were 
specifically reserved to the United States, in all government 
land, our fathers probably supposing these constituted the only 
mineral wealth worth reserving. One section in every town- 
ship, numbered sixteen, was reserved for the purposes of edu- 
cation. 

When a town or village is laid out, all the land included 
within its limits is platted, upon a map, accurately drawn, which 



i 



LAND VALUES. 347 

is kept in the offices of the town or city. Anyone who owns 
land within the limits of the town or city may sub-divide it into 
lots by having it surveyed by a competent surveyor^ which survey 
must be acknowledged by himself and the surveyor before a 
notary^ and a true plat with such acknowledgment filed with the 
County Eecorder. One who subdivides land usually names the 

subdivision after himself and thereafter in describ- 
subdivisions ing any lot or parcel of the land the description 

must include^, in addition to the number of the 
township^ section^ and part of section^ the name of the subdi- 
vision^ number of block and lot. A subdivision may be subdi- 
vided again and this is a re-subdivision^ or a lot may be divided 
into two or more lots and these are called sub-lots. A legal 
description of a sub-lot may then read somewhat as follows: Sub- 
lot three of lot thirty in Brown^s resubdivision of the south 
twenty acres of the East one-half of the West one-half of the 
Southwest quarter^ section eighty township thirty-nine^ range 
fourteen East of the Third Principal Meridian, Cook County, 
Illinois. 

Land values depend upon innumerable conditions, and as the 
conditions change the values are liable to change also. Farming 
land is chiefly valuable on account of its fertility and other favor- 
able conditions for raising produce, its nearness to market, trans- 
portation facilities, etc. City lots are dependent for their value 

chiefly upon location, those in the center of trade 
Values being the most valuable. As cities grow older and 

increase in business and population, the pressure 
for desirable lots in good locations grows heavier and prices ad- 
vance. Improvements upon land, however, are constantly dete- 
riorating from age and use and this acts as an offset in a degree 
against the advance in the land values. In large cities, for 
instance New York and Chicago, substantial improvements are 
frequently destroyed and modern ones of greater height erected. 
The invention of the modern ^^skyscraper'^ has made possible the 



348 PURCHASE AND SALE OF REAL ESTATE. 

carrying up of buildings to practically an unlimited height^ sur- 
passing the renting space afforded in buildings of the old type 
and construction several f old^ but not necessitating an increase in 
the size of the land. The cost of maintenance and the expense 
in the operation of these new buildings are proportionately less 
than in the old. All this^ of course^, has a tendency to greatly 
increase the land values of this character of property. 

Values of property are largely determined by the rents or 
income^ if it is improved^, and;, if unimproved, what income it 
may be made to produce. The stability of property also affects its 
value, — the question whether the conditions of location, etc., 
will warrant a continuation of income. This is determined by its 
accessibility to transportation, etc., the properties in centers of 
great population being of the highest value and receding in value 
from those centers as their accessibility becomes less. The law 
of supply and demand regulates to a large extent the value of 
real property the same as personal property. Property obtains 
an abnormal value frequently from overconfidence due from 
various causes, that are sometimes not warranted by the stability 
of the community or its industries. In growing towns and cities, 
all classes of real property are more or less in a transient state, 
changing as the character of localities change. Thus residence 
property deteriorates materially in the event of the removal of 
residents to new and popular locations. As a result properties 
sometimes a distance of eight or ten miles from centers of activity 
are more valuable than intermediate property. Business prop- 
erty then being the most staple and producing the greatest in- 
come, has, of course, the highest value, and being in demand is 
purchased to earn on the lowest percentage of income. Some- 
times these properties are purchased to net the investor as low 
as four per cent, per annum. 

The most desirable form of investment in property, and by 
far the safest, is to purchase land and then lease it for a long 
period, usually ninety-nine years, the lessee or lessees agreeing 



r 



LEASES. 349 

to pay general taxes and all other obligations incurred by the 
ownership of the land;, and in addition^ as security for the pay- 
ment of the rent and all additions thereto, erect an improvement 
on the property which he maintains during the life 
Ninety-nine- Q-f ^^q leasc, Said improvements reverting; to the 

Year Leases n 

owner of the land at the termination of the lease by 
purchase, or otherwise, according to agreement. It is usually a 
beneficial arrangement also to the lessee, as it affords him all the 
rights of ownership of the land, providing, of course, that the 
ground rents and all the covenants of his lease are promptly met, 
without investing a large sum of money in the title. Long term 
leases of ground as previously stated, are usually made for the 
term of ninety-nine years. This is only a custom, following the 
old theory that a conveyance or letting of land fpr a period of 
more than three average life times, that is three life times of 
thirty-three years each, was an absolute conveyance and not a 
lease. Leases may just as properly and legally be made for one 
hundred years, or nine hundred years, or nine hundred and 
ninety-nine years as for ninety-nine years. 

Having investigated the present condition and future pros- 
pects of a property and decided upon its purchase, the buyer 
enters into a written contract* with the seller, or his agent, in 

which the seller agrees to sell the property at an 
Real Estate ao-reed price, to deliver a "merchantable^^ abstract 

Contract i • ^ n • i • 

showing a perfect title m him, and to convey the 
same by deed properly executed. On his part, the buyer agrees 
to buy or receive the property within a specified time, usually 
thirty days, after a complete abstract of title has been furnished 
him by the seller, showing perfect title in him, and to pay for the 
property the price agreed either in cash or installments as agreed. 
The buyer usually makes a cash deposit of about 5 per cent, of 
the purchase price when the contract is executed, which is to be 



♦All contracts with a reference to the purchase of real estate must be 
in writing in order to be valid. 



350 PURCHASE AND SALE OF REAL ESTATE. 

refunded in case the transaction is not consummated through the 
fault of the seller^, or is forfeited to the seller in case the buyer 
fails to carry out the agreement. If the transaction is consum- 
mated the contract money is applied upon the purchase price. 

The seller then furnishes an abstract of titlC;, which may be 
procured from an abstract company^ showing the complete his- 
tory of the ownership of the property to the present holder. 
This is examined by the buyer or his attorney.* Past convey- 
anceS;, encumbrances^ the rights of heirs^ and especially minors, 
judgment creditors and many other points must be carefully 
watched and scrutinized in the past history of the property. So 
many questions of law are involved in the examination of titles 
to real estate that a good lawyer is a necessity. Defects in titles 
may be cured in various ways, many of them by 
Examination sccuriug quit claim deeds from possible claim- 
ants by purchase or otherwise. Some defects are 
cured by time, while others are incurable. Properties sometimes 
lie unimproved and unsalable in our cities through some defect 
in title until lapse of time cures the fault. It is needless to say 
that the buyer should be absolutely safe in the quality of title 
which he accepts. 

The next step is the execution and "^^passing of the papers'^ 
which convey title. On the part of the seller or grantor this 
consists of a warranty deed signed by him and the signature duly 
acknowledged by a notary. If the grantor is mar- 
Passingof ried, the wife, (or husband, as the case may be,) 

must join in the execution of the deed, and, if the 
grantor is a bachelor, or spinster, the fact must be recited in the 
deed. The buyer, or grantee, on his part pays the purchase 
money, or in case any portion of the purchase price is to be paid 
at future dates, he executes notes therefor, and a mortgage or 
trust deed on the property as security for their payment. The 



♦We have Guaranty Companies which issue policies of insurance against 
defects in titles, but the examination of the abstract is the most common 
method. 



MORTGAGE AND TRUST DEED. 

wife or husband of the grantee need not join in the exec/ 
a mortgage or trust deed given to secure purchase money^ but in- 
all other cases where such instruments are executed she or he 
must so join. 

As explained in a previous chapter^ a mortgage is virtually a 
conveyance of property to the mortgagee, with a provisional 
clause that in case a certain note shall be paid upon a given date 
then the conveyance described in the mortgage shall be void and 
the title shall vest in the mortgagor. A deed of trust is a con- 
veyance of property by the mortgagor to a third person called a 
trustee, to be held by him as security for the notes given. After 
the notes are paid the trustee ^^releases" or recon- 
Mortgageand ygyg -(-j^g property to the grantor in the trust 

Trust Deed 

deed by the execution of a release deed. This 
is the more common method of securing real estate notes. 
When there is a default in one note of a series or interest 
upon one of the notes, by a provision in the mortgage or trust 
deed such default causes all of the notes to fall due at once at 
the election of the trustee or legal owner of the notes. This is 
necessary in order that action may be taken under the mortgage 
or trust deed to enforce full and complete payment and avoid the 
necessity for foreclosure proceedings upon each note separately. 
Mortgages are still used largely by insurance corporations 
in loaning their surplus capital, for the reason that they do not 
expect to transfer the paper and the mortgage gives publicity to 
the fact that they are the actual lenders of the money, but by 
individuals the trust deed form is preferred as it enables the 
owner to transfer the trust deed and notes without recourse or 
publicity, the actual lender not being known in the trust deed. 
In 1879 a law was passed in Illinois making the proceedings to 
foreclose a mortgage on real estate and a trust deed practically 
the same. Prior to that date it was not necessary for the mort- 
gagee to file a bill of complaint, etc., it being only necessary for 
him to advertise the property a certain number of days and sell 



352 PURCHASE AND SALE OF REAL ESTATE. 

it to the highest and best bidder. The law was no doubt enacted 
largely in the interest of the borrower, giving him a certain pro- 
tection in the event of a fraudulent foreclosure, etc., and for the 
reason that a trust deed conveys the property absolutely under 
certain conditions and enables the paper to be more readily sold 
or used as collateral security for loans. 

In foreclosing a trust deed or mortgage the complainant files 
a bill of complaint in the court having proper jurisdiction, making 
the signers of the notes and trust deed, and all parties having 
any interest in the property, defendants. The court usually 
refers the case to a Master in Chancery for the purpose of taking 
evidence and arriving at a conclusion as to the amount due. To 
this report either parties have a right to file and argue objections 
with the Master. In the event of the Master's report being 
favorable to the complainant and sustained by the 
Foreclosure court, a dccrcc of salc is entered. The Master 

then advertises and sells the property to the high- 
est and best bidder for cash. This being approved by the court 
the Master executes a certificate of sale to the purchaser, which 
certificate will entitle the purchaser or holder thereof to a deed 
at the expiration of the redemption period. This latter is one to 
two years in different states*, — a period of time in which the 
mortgagor may have a final opportunity to recover his property 
by paying up his debt with interest and costs. 

During the continuance of the mortgage the owner of the 
property has what is called *^^an equity of redemption.'^ He 
enjoys the same right of ownership over the property (assuming, 
of course, that interest and maturing notes are paid when due) 
as though the mortgage and trust deed did not exist. He has 
the right to transfer by deed, or to again mortgage the property, 
subject, of course, to the rights of the holder of the previous lien. 
In case the property is sold while it is under mortgage the pur- 
chaser either buys it '^subject to" the mortgage, or "assumes and 



♦In Illinois the redemption period is fifteen montlas. 



EQUITY OF REDEMPTION. 353 

agrees to pay^^ the incumbrance. In this latter events, the pur- 
chaser of the property^ by accepting such a deed^ obligates him- 
self personally to pay the incumbrance and in case of foreclosure;, 
if the property does not sell for enough to pay the mortgage 
together with interest and costs, he may be held for the balance. 
It is to the interest of the purchaser to see that the deed is 
properly placed on record in the office of the Eecorder of Deeds. 
If the buyer fails to record his deed and the seller should fraudu- 
lently convey the property over again or mortgage 
Recording it to an innoccnt person who placed his deed or 

mortgage upon record first, he, the innocent pur- 
chaser, would be protected in his title. The same principle 
holds in regard to recording other documents. The mortgagee 
must at once file his mortgage for record, lest another mortgage, 
sale or judgment takes precedence over it 



FIRE INSURANCE. 



CHAPTEE XXXVIII. 

INDEMNITY FOR LOSS BY FIRE. 
HISTORY; CLASSES OP COMPANIES; RISKS; RATES. 

In the "Wealth of ISTations^^ the author* expresses the philos- 
ophy and purpose of fire insurance in the following: " The 
trade of insurance gives great security to the fortunes of private 
people, and by dividing among a great many that loss which 
would ruin an individual makes it fall lightly and easily upon the 
whole society/^ Fire insurance makes commercial credit pos- 
sible. Without it business would be restricted to a cash basis 

and the future would be uncertain and unsafe. 
oSect^" Fire insurance became a necessity when people 

began to accumulate property of a destructible 
character. Prior to 1666^ the only sort of indemnity obtainable 
against loss by fire was to be secured in membership in guilds 
or associations having for their object^ or one of their objects, 
mutual relief in case of fire loss. The great fire of London, how- 
ever, which raged continuously for four days from September 2, 
1666, opened the eyes of the world to the possibility of loss by 
fire. Insurance by individuals, which is a common practice in 
England at this time, became a business. Companies were or- 
ganized and one of them established in 1696 has survived the 
test of time and is in existence today. Primarily, these com- 
panies were organized to extinguish fires in property belonging 
to members, which property was ordinarily marked by a tin 
sign. Incidentally the company assumed the loss by fire. The 



♦Adam Smith. 

354 



LLOYDS. 355 

"^^fire department'^ idea soon passed away, and the insurance 
feature only remains; and it has become an integral part of our 
modern commercial structure. 

There are three kinds of insurance institutions: 1. Lloyds* 
or Individual Underwriters, 2. Mutual Companies and (3) 
Stock Companies. In the Lloyds system an individual, or a 
group of individuals acting each in an individual capacity 
through a common attorney, enter into a contract of insurance. 
The insurer known as the "Underwriter^' in this case, pe"r-sonally 
receives the premium and pays the loss, and the 
Lloyds contract is just as good as the man or the men 

back of it. The noticeable disadvantage of this 
plan of insurance is the necessity, in case of disagreement as 
to the amount of the loss, of bringing legal action against each 
one of the individual underwriters separately. It is also diffi- 
cult to ascertain the present or future responsibility of the un- 
derwriters w^ho are obliged neither to make statements nor to 
maintain reserves for unearned premiums or other liabilities. 
In England, this system of Lloyds or individual insurance has 
assumed large proportions and has attained a recognized stand- 
ing commercially. In the United States the system is compara- 
tively unknown. Whether it can adapt itself to our conditions 
successfully, is yet to be seen. 

In the mutual company every member assumes a portion of 
every other members' risk. The policy holders are the company. 
If a loss is sustained, the policy holders are assessed proportion- 
ately for the loss. Theoretically, this system of 
Companies ^^^ iusurancc should be workable; practically it has 

never been successful, except in a local or special 
way. Mutual fire companies confining their operations to locali- 
ties where values are widely distributed, as in the case of farming 



* The term Lloyds originated from a coffee house kept by Edward Lloyds 
in Tower street, London, about 1688, where merchants and ship-owners 
were accustomed to meet, and responsible individuals would assume risks, 
either severally or jointly, for a premium consideration. 



356 FIRE INSURANCE. 

communities;, for instance^ have lasted. It is also true that 
mutual fire companies^ making a specialty of certain classes of 
isolated manufacturing properties have been successful. But 
the history of mutual fire companies, with the exceptions noted, 
has been imsatisfactory in the United States. 

The stock company is the fire insurance company as we com- 
monly know it. It is a corporation with a paid up capital. 
If conservatively conducted^ it will also accumulate a 
considerable surplus for the conflagrations which are sure to 
come. This company files and publishes annually, statements of 
its condition. It is examined by the state periodically or on 
occasion, if an emergency arises. Its policies are 
Companies ^^ ^ standard prescribed by law, and its agents are 

licensed by the state in which they reside. The 
stock company is compelled by law to set aside a specified part 
of its premium income as "unearned premium.^^ So far in the 
experience of this country, this system of insurance has appeared 
to be best adapted to our needs and most satisfactory for general 
purposes. 

The legislatures of a number of the states have passed laws 
prescribing the kinds of policies that companies may use in those 
states. These are called standard policies. The so-called New 
York Standard Policy has been adopted in a large number of 
the states as the legal policy. In addition to this, many of the 
states have enacted statutes making it obligatory upon fire 
insurance companies to submit their books, vouchers and securi- 
ties to the inspection of an examiner appointed by the governor 
of the state. 

The consideration in an insurance policy is called the premi- 
um. The premium is calculated at so many dollars or cents per 
$100 of insurance, which is known as the rate. For example, at 
$1.50 rate, $3,000 of insurance gives a premium of $45. This 
is the annual premium. Policies for shorter periods 
than one year are written at what are called short rates. If the 



RATES. 357 

annual rate is $1.00^ the short rate for one month would be 20 
cents; for two months^ 30 cents; for three months, 40 cents, etc., 
the rate for the period becoming relatively smaller 
Rates as the period approaches one year. There is an es- 

tablished table of short rates showing the rate 
for every possible number of days in the 365, composing 
the year. On certain classes of property, term policies, or policies 
for longer than one year, can be secured. On residence property, 
it is the prevailing practice to write two-year policies for one 
and one-half annual rates, three-year policies for two annual 
rates, and five-year policies for three annual rates. The entire 
term premium must be paid in advance, but the saving effected 
by this plan of term insurance is considerable, and amounts to 
a large interest on the anticipated portion of the premium, as 
may be readily ascertained by an easy calculation. 

The rate, which is the prime factor in the estimation of the 
insurer, may be determined in either one of two ways. First, it 
may be made arbitrarily upon the judgment of a competent 
and experienced person, after a personal examination of the 
property to be insured. Such rates are designated ^'^flat rates,^' 
and until recently nearly all the fire insurance rates were '^'^flat 
rates.^^ The objections to such rates were that 
Schedule Rates they wcrc not susccptiblc of analysis or explana- 
tion, and being made by different persons or the 
same person under diverse influences, they were often more or 
less inconsistent. Most of the fire insurance rates in late years 
are the products of schedules. The schedule for frame buildings 
is a comparatively simple one. There being no special points of 
construction to be considered, the schedule has reference prin- 
cipally to the matters of occupancy and exposure. 

The schedule for brick buildings is a more complicated affair. 
In this case there is a basis rate for a standard building not over 
a stated height and specified ground area. The figure set for this 
standard building is known as the ^^basis rate,^^ and it is intended 



358 FIRE INSURANCE. 



to measure the sufficiency of the local water supply and fire pro- 
tection^ together with other conditions calculated to affect the 
general fire risk of the locality. To this basis rate 
Basis Rate is added charges (made according to carefully pre- 

pared tables compiled from the best obtainable ex- 
perience) for the following items entering into the fire risk. 
The items here given are from the schedule for brick mercantile 
buildings of ordinary construction in use at present in the City 
of Chicago, Illinois. 

1st. Height. For each story over the standard height;, a 
charge is made; this charge increases with the stories, because 
the difficulty of reaching and extinguishing a fire increases in 
proportion to the height of a building. 

2d. Area. The risk of spreading fire increases directly as 
the area of the building and a charge is made for area^, over 
standard, accordingly. 

3d. Walls. To protect the building from adjoining build- 
ings and to bear the weight of its contents, a building should 
have walls of certain strength, and deficiency in that respect is 
charged for in the schedule. 

4th. Communications. An opening into an adjoining build- 
ing makes possible the communication of a fire. If the com- 
munications are unprotected, the buildings are rated as one risk. 
If the communications are protected by proper iron doors, there 
is a charge made on the theory that the doors may not be shut 
in case of fire; this charge increases with the number of such 
communications. 

5th. Exposures. Charge is made for exposure based upon 
the seriousness of such exposure, its nearness and the precau- 
tions taken to guard against the exposure. 

6th. Elevator shafts. Unless built of non-combustible ma- 
terial with fire-proof doors at each floor, an elevator shaft acts 
as a flue to carry a fire to every floor in the building, and is 
heavily charged for under such circumstances. 



n 



RATES. 359 

7th. Floor openings. Stairs and other minor floor open- 
ings act much as an elevator shaft, though in less degree, and 
they are charged for accordingly. 

8th. Condition. It is becoming more and more the prac- 
tice in schedule rates to charge for unsafe condition of premises. 
These charges are intended to be temporary in their nature, and 
are supposed to measure the hazard existing by reason of poor 
condition of premises. As soon as the premises are put in safe 
condition the charge is removed. By reason of careless man- 
agement, however, charges for condition often amount to a 
permanent charge, and become an unnecessary tax on the 
business. 

Credits are allowed for protection intended to prevent the 
inception or the spread of a fire. Stand pipes with ladders on 
buildings, giving assistance to firemen, are the basis for a credit 
of one cent for each story. Automatic fire alarm service, or 
telephone watch service reporting to a central station is a 
large measure of protection, and for these a credit of ten per 
cent, of the building rate is ordinarily allowed. 
Credits Special construction, such as open mill construc- 

tion, and other superior construction, is encour- 
aged by an allowance in the rate. Automatic sprinklers (a sys- 
tem of piping through a building with faucets which are opened 
by the melting of a fusible link, back of which are adequate 
water supplies in gravity or pressure tanks), afford the best 
protection known at this time against the spread of fire, and for 
this system of protection a very considerable credit is allowed in 
the insurance rate. 

There are other charges and credits, but the ones cited will 
sufiice to explain the theory on which the unoccupied building 
rate is constructed in the process of schedule rat- 
Buiiding Rate ing. After the unoccupied building rate is ascer- 
tained, a charge is made for the occupancy, accord- 
ing to the hazard of such occupancy, and the result is the rate 



360 FIRE INSURANCE. 

at which the building insurance is written. Applying these 
principles for an example^ we might find such a case as this: 

''Basis rate'' (4-story) $0.40 * 

Height (6 stories) . .15 

Area (5,000 ft. excess) 10 

Walls (deficient 2 stories) 04 

Communications (one protected) 10 

Exposure (frame — no shutters) 15 

Elevator Shaft (lath and plaster) 10 

Floor Openings (6) 06 

Gross unoccupied building rate. $1.10 

Credit for standpipe and ladder. . . .$0.06 

For automatic alarm (10 per cent.) . . .11 .17 

Unoccupied building rate 93 

Occupancy — Crockery with packing 10 

Occupied building rate $1.03 

Having ascertained the rate on the building (which in this 
case is made more than ordinarily complex, for the purpose of 
illustration) the next step is to calculate the rate on the contents. 
On the theory that any brick building is better than its con- 
tents, there is added to the occupied building rate a certain sum 
intended to measure the susceptibility of the contents to damage 

by fire or water. For example: Boots and shoes 
Consents ^^ cascs would classify twenty-five cents more than 

the building. An open stock of dry goods, 50 
cents; a millinery stock, 80 cents, and a stock of tobacco, $1.00. 
Taking the crockery stock, for example, there would be added 
to $1.03 (the occupied building rate) 45 cents for a crockery 
stock, making the rate on the contents, $1.48 per $100 of in- 
surance per annum. 

If there is more than one tenant in the building, on the 



i 



RATES. 361 

theory that each additional occupant introduces some moral 
and physical hazard, there is a charge made, the amount of which 
charge is determined by the nature of the occupation. If a 
stock of merchandise occupies but one floor in a build- 
ing, it is charged for location. The grade floor is standard, with 
no charge for location. In the basement, ten cents are added 
for liability to water damage, while above the first floor, the 
^^loading^^* for each floor is the square of the floor occupied. For 
example the loading for the second floor is four cents, the third 
floor nine cents and so on. The loading for stocks occupying 
more than one floor is obtained by striking an average for the 
floors occupied. When the entire building is occupied by a 
single concern no floor loading is made. 

For buildings of fire-proof construction there is a ^^fire-proof 
schedule,^^ designed to meet the different and complex conditions 
found in this important class of risks. Likewise for manu- 
facturing risks, there are special schedules intended to measure 
the hazards existing in the different processes of manufacture 
with credits for safeguards calculated to eliminate or reduce such 
hazards. 



♦Loading is a term used for additions to the basis rate on account of 
location or ot^er special conditions. 



CHAPTEE XXXIX. 

FIRE INSURANCE— Continued. 
BOARDS OP UNDERWRITERS; CO-INSURANCE; LOSSES. 

Boards of Underwriters are associations composed of the 
representatives, managers or agents of insurance companies 
doing business within the state in which the association has 
jurisdiction. Such boards are either organized under the laws 
of the state, or are voluntary organizations for mutual benefit 
and protection. 

It is the function of Boards of Underwriters to prepare and 
apply schedules for rating the risks located within their juris- 
diction. At the present time, as schedule rating is little more 
than in its infancy, there are many inconsistencies in rates on 
similar risks in different localities. Gradually as the scheme of 
schedule rating develops, the comparisons of experience of dif- 
ferent localities and the suggestions from central 
und^erwriters Organizations of companies will equalize these in- 
consistencies and make the schedules more uni- 
form. It will not be long before the merchant or manufacturer, 
who now has the satisfaction of knowing that his local competi- 
tors are rated under the same schedule as himself will have the 
added satisfaction of seeing his outside competition rated under a 
schedule so similar that it amounts to the same for all practi- 
cal purposes. Nevertheless, it will always be true that certain 
classes of risks will be more profitable in one locality than in 
another. This, by reason of natural advantages and the absence 
of moral hazard, and this the fire insurance rate must always 
take into account. Absolute uniformity in schedules throughout 
a wide territory is hardly practicable on that account. 

362 



BOARDS OP UNDERWRITERS. 36B 

In addition to the business of making rateS;, the local board 
of underwriters has other and important duties to perform. Its 
corps of trained inspectors is constantly at work to reduce the 
local fire hazard by requests^ failure to comply with which, after 
a reasonable time, subjects a risk to an increased rate for poor 
condition. The local board of underwriters stands also as the 
protector of the public water supplies^ and it has not infrequently 
happened that boards of underwriters, in large cities, have 
brought about the separation of the fire department from politics. 
Intelligently administered, a local board of underwriters can 
be of large service in a public way. 

With the exception of rates of insurance on residence prop- 
erty, practically all fire insurance rates are now based on an 
amount of insurance to be carried equal to 80 per cent, of the 
actual cash value of the property insured. This agreement, 
which is a special one written in the policies, is variously known 
as the "80 per cent, clause'^ or the "reduced rate agreement.'^ 
its present use grew out of conditions such as 
Co-Insurance this: One merchant with a stock valued at $10,- 
000 rating 1 per cent., insured his stock for $4,000 
at an annual premium of $40, carrying the rest of his risk him- 
self. Another merchant also with a stock valued at $10,000 and 
a 1 per cent, rate would insure for $8,000 and pay an annual 
premium of $80. In case of a $2,000 loss on each of these stocks, 
the companies would sustain a 50 per cent, loss on 
the first stock and a 25 per cent, loss on the second. That is, 
the companies would be obliged to pay $2,000 on a $4,000 
policy in one case and $2,000 on an $8,000 in the other. In 
case of a $4,000 loss on each stock, the loss to the companies 
would be total in the first case and 50 per cent, in the other. A 
plan of rating which permitted such inequality was certainly 
wrong. The merchant carrying 80 per cent, insurance in this 
case, was twice as good a risk to the companies as the merchant 
carrying 40 per cent, insurance, and it became evident that the 



364 FIRE INSURANCE. 

rate must be conditioned on some definite percentage of insur- 
ance to be carried. Eighty per cent, insurance was generally 
agreed upon as a fair requirement. Companies were quite willing 
that the property owner should be interested in his own risk^ 
to the extent of taking the last 20 per cent, of fire risk^ if he 
desired to do so. There is nothing in the 80 per cent, agree- 
ment;, however, which prohibits a property owner from insuring 
100 per cent, of his value, if he prefers. He may likewise, if he 
chooses, carry but 70 per cent, insurance, in which case he pays 
10 per cent, additional rate, for the greater liability to the com- 
panies of a heavy loss. For 60 per cent, insurance, 20 per cent, 
penalty is added, and for 50 per cent, insurance, the penalty is 
30 per cent. With less than 50 per cent of insurance, few com- 
panies would carry an ordinary risk. 

Notwithstanding its general use, the 80 per cent, clause is 
widely misunderstood by intelligent business men, the common 
fallacy being that under this clause the companies agree to pay 
80 per cent only of a loss. The actual operation of an 80 per 
cent, agreement, in case of a loss, can best be illustrated by 
examples: Suppose a stock, the cash value of which is $20,- 
000, requiring $16,000 of insurance under the 80 per cent, agree- 
ment, should be partially destroyed. In the first example, let there 
be $10,000 insurance, the companies pay ten-sixteenths and the 
owner loses six-sixteenths. In the second example, have $12,- 
000 insurance, companies pay twelve-sixteenths and owner loses 
four-sixteenths. In the third example, with $14,000 of insurance, 
companies pay fourteen-sixteenths, owner loses two-sixteenths. 
In the fourth example, there is $16,000 insurance. Here the 
conditions of the guaranty are complied with, and the companies 
pay all of the loss provided it does not exceed the face of the 
policy. If over 80 per cent, of insurance is carried, the guaranty 
is still fulfilled, and the companies pay the entire loss. In such a 
case, however, the loss would be spread over a larger amount of 
contributing insurance and fall lighter on each company, if 
there were more than one company. 



II 



POLICIES. 366 

It is desirable^ on occasion^ for an insurer to secure a policy 
covering property indefinitely located, as, for instance, covering 
merchandise, being received at and shipped from freight depots 
and docks. Or on rented pianos beyond the control of the owner. 

Or on merchandise being manufactured and in the 
insur^ifce hands of tailors or other artisans. In such cases, 

and they are numerous, it is usually possible to 
secure a ^^floating policy,^^ covering anywhere, with some rea- 
sonable restriction as to the amount for which the company 
shall be liable in one fire, and a further provision as to the per- 
centage of insurance to be carried. Such floating policies are 
usually at a relatively high rate, because of the uncertain and in- 
definite liability assumed by the company. 

It is often convenient for a merchant occupying two or more 
buildings, or a manufacturer with a plant consisting of several 
buildings, to secure a policy covering stock in the several build- 
ings or covering the entire manufacturing plant and its contents. 

This can ordinarily be done under what is termed 
Poi^^es ^^^ blanket policy^^ which is written to cover the 

entire subject of the insurance in or on the several 
buildings. The rate for a blanket policy is arrived at by calculat- 
ing the premium on the value in or on each specific building at 
its individual rate, and dividing the aggregate premium thus 
obtained by the total amount of insurance. The result would be 
the average rate. 

An insurance contract is not, as some think, a ^^promise to 
pay'^ a specified sum in case of fire. Xeither is it, as some would 
have it appear, a one-sided contract by which the company can 
avoid a legitimate claim. In the nature of the case an insurance 

contract is drawn in general terms to be used in 
Contract a Variety of conditions, and it cannot have the 

directness or brevity of a single and ordinary con- 
tract between two parties. There are a few general features, 
however, of an insurance policy or contract, which, if known. 



366 FIRE INSURANCE. 

would assist greatly in a clear understanding of its terms, and 
do much toward the avoidance of possible differences. At the 
outset let it be understood that the insurance contract is per- 
sonal. It insures somebody (not anybody) against loss by fire. 
Any change in ownership must be consented to by the company 
in writing. The subject of the insurance must be definitely set 
forth in the written portion of the contract. A policy on a 
stock of boots and shoes, for instance, does not cover groceries 
or dry goods. Any change in the character of the property 
insured should be immediately and fully endorsed in writing 
on the policy. 

In lines 16 and 17 of the ISTew York Standard Policy, it is 
stated that the entire policy shall be void "if the interest of the 
insured be other than unconditional and sole ownership,'^ "un- 
less otherwise provided by agreement endorsed hereon.^^ Failure 
to conform to this provision of the contract is pro- 
Ownership"^ ^^^^ ^^ troublc. If the Ownership is not sole and un- 
conditional, the character of the ownership should 
be fully set forth. For illustration, if a building stands on 
leased ground, if the ownership of property is partial or con- 
tingent, if the property is incumbered or under contract, these 
facts should be clearly stated in the policy. 

The policy also provides that any change in title or posses- 
sion of the property will render, the policy void unless consent 
of the Company is first obtained in writing. The object of this 
requirement is to place the Company in possession of all facts 
relative to each risk. If a change is made for any cause then 
the party insured should notify the Company through its local 
agent and obtain written consent to the change. 
ownfrLhip ^f ^h^ pa^ty insured disposes of his interest in any 

property covered by a policy of insurance it is 
absolutely necessary that the policy should be assigned to the 
purchaser and consent of the Company obtained to the transfer 
or the policy will become void. A change from an individual 



OWNERSHIP. 867 

ownership to that of a copartnership, or to an incorporated 
company^, or where one partner retires from a firm or a new 
partner is admitted to the firm, is a change of ownership of firm 
property and affects the insurance at once, making the policy 
void unless the company is notified and its consent obtained in 
writing. 

In lines 39 to 44, inclusive, of the New York Standard 
Policy are set forth certain articles which are not insured unless 
specifically named: 

"Unless liability is specifically assumed hereon, no loss to 
awnings, bullion, casts, curiosities, drawings, dies, implements, 
jewels, manuscripts, medals, models, patterns, pictures, scientific 
apparatus, signs, store or office furniture or fixtures, sculpture, 
tools; nor property held on storage or for repairs; nor, beyond the 
actual value destroyed by fire; nor loss occasioned by ordinance 
or law regulating construction or repair of buildings; nor by in- 
terruption of business, manufacturing processes, nor otherwise; 
nor for any greater proportion of the value of plate glass, fres- 
coes, and decorations than that which this policy shall bear to the 
whole insurance on the building described.^^ 

If any of these are to be insured, they must be incorporated 
in the written portion of the policy. With the exception of 
certain floating policies, already described, an insurance policy 
covers property "all while contained,^^ in a certain specified 
building or buildings. Any change of location therefore should 
be at once endorsed on the policy. 

Lines 11 to 30 of the Standard Policy set forth certain con- 
ditions under which the policy is voided, unless consent is en- 
dorsed in WTiting. Generally stated (and excepting reference 
to title, already explained) these conditions are: The procure- 
ment of other insurance, the operation of a factory after 10 P. M. 
or ceasing to operate for more than ten consecutive days, any 
increase of hazard within the control or knowledge of the in- 
sured, the making of extraordinary alterations or repairs, the use 



868 FIRE INSURANCE. 

or storage of volatile products of petroleum or other explosive 
or highly inflammable substances^ the vacancy or non-occupancy 
of a building for more than ten consecutive days. Permission 
for any of these may be obtained^ in ordinary cases, on applica- 
tion to the agent of the company, which permission should be 
fully endorsed in writing on the policy. It should always be 
remembered that a fire insurance policy is a contract, subject to 
the general law of contracts, that usage does not nullify its 
conditions and that once voided, it can only be revived by the 
consent of both parties. 

When it is desired to place a policy of fire insurance as 
collateral security with a bank, or with a mortgagee no written 
assignment is necessary, but in such cases the policy should 

contain a clause ^^loss, if any, payable to 

ciause^^^^*^ as his interest may appear.^^ This is the ^%ss 
payable clause'^ and is usually made in favor of 
the trustee of the trust deed securing the loan. This clause 
must be inserted by the company or its agent. 

Among Insurance Companies it is the custom for some com- 
panies to issue a policy for a larger amount than they desire to 
carry themselves and in order to reduce their line on the risk 
they ask some other company or companies to re-insure their 
liability under the policy for a certain amount, and for this 
they pay the other company a consideration called the pre- 
mium. The original insured has no claim on the re-insurance, 
his contract being with the company whose policy he holds. 

Comparatively few policy holders sustain a fire loss. Other- 
wise the companies could not afford to issue $1,000 policies at an 
average premium of about $10. There must be a goodly per- 
centage of "safe risks.^' Nevertheless there is but 
Loss Claims one way to transact fire insurance business, i. e., 

on the theory that there will be a loss and at once. 
A fire insurance company conducting its business on any other 
theory would become insolvent and a merchant or manufacturer 



LOSS PAYABLE. 369 

who is careless, negligent or tardy about his fire insurance 
will very likely come to grief. It behooves a man to place in- 
surance at once when the need for it arises, have the policy is- 
sued, examined, paid for and put away for safekeeping with the 
same care and promptness that marks his banking or other im- 
portant business. 

When a loss comes, there is a natural and regular order to 
pursue, attention to which will save time and expense to the 
insured and company alike. First, notify the company or its 
agent. Then set about diligently to protect the property from 
further loss. After doing this set out to carefully ascertain the 
amount of the loss. If the property is a building, have com- 
petent persons furnish an estimate of the cost of repairing the 
damage. If the property is personal, prepare a schedule, setting 
forth in one column the sound value, and in the other your 
opinion of the loss or damage. With specific information of 
this character in your possession you are in a position to ne- 
gotiate with the company's adjuster intelligently and promptly. 
In case of disagreement with the company as to the amount of 
loss the policy provides for an appraisal by three competent and 
disinterested persons; one to be selected by the insured; one by 
the company, the two thus selected choosing the third. If the 
property is personal and totally consumed by fire, the value of 
a good set of books and a complete inventory cannot be over- 
estimated. 



LIFE INSURANCE. 



CHAPTER XL. 

INDEMNITY AGAINST MISFORTUNE. 
HISTORY; METHODS; KINDS OP COMPANIES; KINDS OP POLICIES. 

Life insurance is the combination of prudent men against 
misfortune. It is an invention of civilization and a practical 
application of the principle of co-operation^ by which many con- 
tribute small sums to indemnify one, or his heirs 
Definition against misfortuue. Property may never burn, 

but every life must terminate, and hence the argu- 
ment of prudence and safety applies even more forcibly in favor 
of life insurance than that of property. Nothing is more un- 
certain than the duration of human life, and yet the problem 
of this uncertainty has been reduced to a moral certainty by a 
long period of observations and classified statistics which form 
the fcasis of the business of life insurance. 

The mathematical doctrine of probability was first enun- 
ciated by Pascal, the great French scholar, in 1654, and has 
since been elaborated by other writers. In 1671 De Witt applied 
it to the duration of human life. Gradually the death rate under 
definite conditions became established from carefully preserved 
records. This result is known as the mortuality 
Pn^abiiities tablcs. These tables represent the probability of 
death of various classes of persons under varying 
conditions, based upon past experience. Nothing is more re- 
liable than the laws of average when applied to a large number 
of eases, and hence the business of life insurance is not specu- 

370 



METHODS. 371 

lative^ but capable of the most exact and conservative manage- 
ment. 

Life insurance was unknown to the ancients. It originated 
in England early in the eighteenth century^ but the first regu- 
larly organized company began business there in 1765. The 
early companies did not require a medical examination as a part 
of the application for insurance. The rates of premium were 

fixed by guesswork, and a board of directors passed 
History upou the applications for insurance. The business 

of life insurance has grown to enormous propor- 
tions and to a greater extent in the United States than in any 
other country. In 1850 there were perhaps a dozen ^^old line^^ 
life insurance companies in existence in this country. Today 
we have about eighty companies with a total amount of insurance 
in force of over $10,500,000,000, having assets of over $2,100,- 
000,000 and a surplus of over $300,000,000. 

Two methods of life insurance are employed. The first is 
where a fixed and uniform rate of premium is charged, known as 
the "level premium^^ plan, because of the uniformity of the 
premium charged throughout a given period. This class of in- 
surance is usually carried on by regularly organized companies, 
either stock or mutual, and known as "old line'^ companies. 

The level premium plan provides for the payment 
Two Methods to the compauy of more than the amount necessary 

to cover the risk during the early years of the 
policy, and the surplus thus accumulated is set aside as a reserve, 
or invested in securities, which, with interest will be sufficient 
to make up the deficiency in later years. The second method 
is known as "assessments^ insurance in which each member of 
the association is required to make payments into the general 
fund for the settlement of death claims, as the needs of the asso- 
ciation may require, or at stated intervals. 

It is a well established rule that the insurer must have an 
insurable interest in the life to be insured for indemity is the 



372 LIFE INSURANCE. 

fundamental idea in all insurance. Insurance without being 
coupled with an interest would be a species of gambling. An 
insurable interest^, however^ does not consist of the ties of rela- 
tionship^ nor dependence for support upon the life insured. In- 
surance may be taken out upon the life of anyone 
Insurable whosc death would cause financial loss to the bene- 

Interest 

ficiary. In England and other European countries 
it is not unusual for business men to take out insurance on the 
life of their ruler to protect them from the financial loss that 
would be entailed by his death. Such insurance is procured with- 
out medical examination^ or even the knowledge of the insured. 
In America this class of insurance is not written^ but in every 
case it is necessary that the applicant should pass a medical exam- 
ination and some companies require an investigation into the 
moral character and financial standing of the insured. 

Life insurance companies are divided into two classes, viz: 
Stock and Mutual. A stock company is one which is owned by 
stockholders, the same as other corporations, who control its 
management and divide its profits. In some stock companies, 
however, the policy-holders are allowed a voice in the manage- I 

ment, and in this respect they partake of the na- f 
uarcompa^i^s' ^^^^^ ^^ mutual compauics. Such companies may 

be called ^^mixed.^^ In a stock company ordinarily 
the policy holders have no share in the management of the com- 
pany. A mutual company is one which is composed of policy 
holders who elect the directors of the company and participate 
in the earnings. The two kinds of companies, however, usually 
operate on the same general business methods. The mutual 
companies are the more numerous. 

The method of insuring lives which naturally first suggested 
itself was to make the contract of insurance for a single year, 
and then renew or extend it from year to year, after the manner 
of fire or liability insurance, increasing the rate of premium as 
the risk increased. There is the more reason for short term con- 



CONTRACT OP INSURANCE. 373 

tracts in life insurance since the risk is constanth' changing. 
The insured is growing older and may at any time develop symp- 
Annuaiand ^^^^^ ^^ discasc. Thus from birth to the age of 10 

Long Term ycars the risk is constantly diminishing and then 

very slowly begins to increase until after middle 
life^ when it increases at a constantly accelerated ratio. 
On the other hand, a property risk may remain substantially the 
same from year to year. 

The contract of insurance is based on the application on the 
part of the insured, containing his ^Varranties, promises, con- 
sents and agreements/^ together with statements of the com- 
pany's medical examiner. The application of the 
Insurance assurcd, together with the payment of the pre- 

mium, constitute the consideration upon which 
the company's obligation rests. On the part of the company, its 
agreement is evidenced by the policy of insurance. A great 
variety of covenants and conditions are embodied in such pol- 
icies. The nature of these will be considered under the title 
"kinds of policies.'' In other branches of insurance, the com- 
panies may cancel the policy at any time by returning a pro- 
rata portion of the premium, but this is not so in the case of 
life insurance. A contract once entered into and 
becTnce^ied°* ^ ^^^^ assumcd, is binding upon the company to 
the end of the term, unless cancelled by the consent 
of the insured. To rule otherwise would be a great injustice 
to the insured since it would leave him without insurance per- 
haps at a time in life when he could not procure it elsewhere. 

Life insurance policies may be divided into four general 
classes, viz: Term, Life, Limited Life and Endowment. Any of 
these may be purchased by a single payment of 
PoUdes* premium, but the usual method is to pay the pre- 

mium by annual or semi-annual installments. 
The formalities to be complied with are similar in all policy con- 
tracts — application, medical examination, etc. A term policy 



374 LIFE INSURANCE. 

merely provides insurance for a certain number of years^ at the 
expiration of which it terminates and has no value. This is the 

oldest form of policy. A condition is sometimes 
Term inserted in a term policy providing that it may 

be renewed at an increased rate at the end of the 
period without a medical examination. Policies of this char- 
acter are called ^^renewable term^^ policies. 

Life policies provide for the payment of the face of the policy 
at the death of the insured^ whenever that may occur. A whole 

life insurance is thus seen to be a term insurance 
Life for the duration of possible life. Ordinary life 

policies provide for the payment of premiums 
during the life of the insured. 

Limited life policies are those in which it is provided that 
after a certain number of payments no further payment of 

premiums is necessary, and that the policy is fully 
Limited Life paid up. The policy may then be held by the 

insured as an asset awaiting realization upon his 
death. The periods for the payment of premiums under such 
policies are usually 10, 15 or 20 years. 

An endowment policy is one which provides that its face 
value shall be payable to the insured at the end of a fixed period 

(10, 15 or 20 years as the case may be) if he sur- 
Endowment vives, or to the bcueficiary if he dies within the 

period. This form of insurance was introduced 
later than the other usual forms. It was expected that it would I 
be the means of inducing many persons to insure, who would not ] 

otherwise do so, in the hope of receiving the face of the policy ^ 

during their lifetime. It especially appeals to those who f 

desire to provide against need in old age. Apparently those who 
take endowment insurance are conscious of superior vitality, I 
since the death rate among endowment policy holders is espe- 
cially low\ 

While different companies have many variations and 



I 



POLICIES. 375 

designations for their different policy plans^ each policy has as 
its foundation one of the above forms. Thus a ^^single premium^' 
policy is one upon which the premium is paid in one amount 
when the policy is issued. Policies of this kind are written 
Single Premium ^^^^^^ hotli the life and endowment plans. Again, 
Continuous an installment policy is one of the above forms of 

Installments . • t ji x • p j xi • x j 

insurance providing that m case oi death, instead 
of the face of the policy being payable in one sum, it is to be 
paid in a certain number of annual installments (usually twenty), 
or it may provide that a certain amount shall be paid yearly 
as long as the beneficiary lives, and should she die before twenty 
years has elapsed the balance of the twenty payments shall be 
payable to the beneficiary's estate. In that case it would be 
called a '^'^continuous installment'^ policy. 

Another form of insurance properly called an ^^installment- 
annuity'' policy, provides that half the face of the policy shall 
be payable in twenty annual installments or forty semi-annual 

installments, the other half of the policy to be 
Not a 5 ^ Bond paid at the end of twenty years in one sum. Many 

companies give this form of insurance a name 
which is to some extent misleading, by calling it a 5% bond. 
They charge a higher premium per thousand and represent the 
face of the policy as being paid in twenty years. The twenty 
annual payments are called coupons, or interest payments. While 
this form of insurance is an excellent investment in certain 
cases, the term 5% bond is misleading in that people are induced 
to believe that they have an investment paying 5% interest. 

Still another form of installment insurance is called a ^^sur- 
vivorship annuity" policy. This policy provides that a certain 
Survivorship amount shall be payable yearly to the beneficiary 
Annuity as loug as he or she lives, all payments stopping 

oicies ^^ j^lg ^^ j^^^ death. Should the beneficiary die 

before the insured, the policy lapses. Some companies provide 
that the premiums shall revert to the insured in event of the 



376 LIFE INSURANCE. 

prior death of the beneficiary. This form of policy is designed 
to furnish protection to a wife or other dependent relative after 
the death of the insured who is the source of support. 

A policy is sometimes issued upon the lives of two people, 
payable upon the death of the first. Such are called joint-life 
policies. They are sometimes taken by husband and wife, in 

favor of their children, or they may be payable 
Joint Life to the survivor. More frequently they have been 

taken out by firms upon the joint lives of the 
partners, and payable to the surviving partner, thereby furnish- 
ing him with sufficient ready cash to buy out the deceased part- 
ners' interest in the business. For this reason it is commonly 
known as partnership insurance. To accomplish the same result, 
partners sometimes insure the lives of each other, thus making 
separate policies instead of joint life. On some accounts this 
is preferable to a joint-life policy, since in case of a dissolution 
of the firm the joint policy cannot be divided. 

There are many firms and corporations whose prosperity is 
often dependent on the ability of its president or manager and 
the stock-holders would suffer heavy loss in case of his sudden 
death. This is especially true where a man of ability, but with- 
out large financial means is carrying on an extensive business 
on other people's money. Many such concerns carry enormous 
lines of insurance upon the life of the man through whom they 
have so much at stake. 

A very few companies have a scheme which they attach to 
policies, providing that instead of the insured paying all of the 
premium, the company will loan him a portion of it each year 

at interest. The idea held out is that annual divi- 
Loan piTn dcuds will carc for all or a large part of the loan. 

This plan cannot be condemned too strongly, as 
it results in an unsatisfactory condition. If the insured pays the 
interest on these loans whose amount is increasing yearly, as 
more premiums fall due then he has a constantly decreasing 



PREMIUM LOAN. 377 

amount of insurance at a rapidly increasing rate. But if both the 
loan and interest are allowed to accumulate, there is a more 
rapidly decreasing amount of insurance at the same rate. In 
either event when this kind of a proposition matures there is 
likely to be a very much dissatisfied policy holder. 

A few companies issue what is called Industrial Insurance. 

This class of insurance is issued on all ages from one to seventy 

years^ in policies ranging from very small amounts 

infuranci ^P ^^ $^^^ ^^ $^^^- ^hc amouut sold is almost 

marvelous. It is, of course, sold principally to 
people of very limited means. 

Several companies insure women on exactly the same terms 
as men, others charge an extra premium or limit them to certain 
plans of insurance, while some companies do not insure women 
upon any terms. 



CHAPTEE XLI. 

LIFE INSURANCE— Continued. 

. PREMIUMS; DIVIDENDS; LOANS; ANNUITIES; ASSESSMENT 

INSURANCE. 

Premiums are payable on definite days and unless the policy 
provides otherwise^ the payments must be made with absolute 
promptness. A grace of thirty days is allowed under some 

policies^ and one month under others^, after the 
Premium°^ first ycars' premiums are paid. The insured 

should distinguish between thirty days and one 
month in this ease, as otherwise the policy may be allowed to 
lapse by failure to make payment on the proper day. 

There are two principal ways of disposing of the profits in 
mutual companies arising under life insurance policies, viz: — 
annual dividends and accumulation of dividends. 

An annual dividend policy is one in which the profits are 
payable in cash to the insured each year as they accrue. An 

accumulation policy is one in which the profits 
Dividends ^^c allowcd to accumulatc for a given term of 

years usually for the length of time the policy 
has to run. When dividends are deferred for periods of five, ten, 
fifteen or twenty years, the option is usually given the insured 
to withdraw the accumulation in cash at that time or apply it 
to increase whatever form of surrender value is selected. Under 
accumulation dividend policies, no part of the profits already 
accumulated is paid in the event of withdrawal or death during 
the dividend period. Different companies have different designa- 
tions for an accumulation policy, a few of which are "tontine,^^ 
''semi-tontine,'' ''deferred dividend'' and "distribution" policies, 
all of which are based upon the same general principle. 

378 



I 



DIVIDENDS. 379 

A favorite method of a few companies is to guarantee a cer- 
tain dividend on a policy and call it a "guaranteed dividend^' 
policy. Another plan of theirs is not to pay any dividends on a 
policy but to make a definite guarantee of a dividend payable at 
maturity of the policy. Such is called a "non-participating" 
policy^ meaning that it does not participate in the profits of the 
company. A guaranteed dividend policy, unless it provides for 
additional dividends, is in reality also a non-participating policy. 

As several elements go to make up the profits of a company, 
such as mortality, interest rates, lapses, expenses, etc., a life 
insurance company never makes a guarantee without a loading 
of the premiums for all contingencies. "Loading'^ is a certain 
allowance made and added to the premium in order to cover 
unexpected losses or expenses before making a guarantee. While 
guaranteed dividend and non-participating policies have their 
uses, it should be remembered that any results procured under 
either would have been received under a dividend paying policy 
and also usually a considerable amount of profits from the load- 
ing of the premiums which a company very seldom has use 
for, but for which every insurance company must make allow- 
ance in order to be perfectly sound and safe under all possible 
conditions. 

While there is a great variance as to the wording of life in- 
surance policies in reference to their restrictions and conditions 
there is almost as much difference in reference to the relative 
advantages in case of the lapse of a policy before its maturity. 
In many companies after a policy has been carried 
Insurance three ycars or more it has some value, provided 

the policy is surrendered to the company issuing 
it within a certain length of time. In some companies a policy 
would have a value, had only one annual premium been paid 
thereon. 

Some companies provide, in case of lapse, for a paid-up 
policy for a smaller amount payable at death no matter when the 



380 LIFE INSURANCE. 

insured should die tliereafter^ while other companies have a pro- 
vision that the policy shall run on for a certain period of time 
for its original amount of insurance^ the length of the extended 
insurance of course being dependent upon the value of the policy 
at the time of its lapse. Some companies also provide cash 
values and loans in lieu of paid up or extended insurance. The 
policies of many companies provide that within a certain length 
of time a lapsed policy holder may be re-instated^, provided 
he is in good health and pays back premiums with interest to the 
date of his re-instatement. 

When a few years ago the privilege was given the insured 
of surrendering his policy in exchange for one of paid up insur- 
ance;, it was called a ^^non-forfeiture'^ provision. And when 

upon failure to pay a premium the insurance is 
Non-forfeiture extended by virtue of former payments^ this is 

called ^^automatic non-forfeiture.^^ Under a non- 
forfeiture policy it is now customary to permit the insured to 
resume the payment of premiums at any time before the value 
of the policy has become exhausted by lapse, the past due pre- 
miums and interest thereon being paid in cash or permitted to 
continue as a loan from the company. 

The policies of many of the companies are now made in- 
contestable after a limited period, and one great company issues 
a policy which is incontestable from the date of issue. Such 

policies were issued in England before they were 
Incontestability introduced here, an extra premium being charged. 

By this clause the company waives its right to 
contest the validity of the policy for any reason whatever, and 
yet it is a question whether, in case of fraud, the company would 
not have the right to contest. 

The policies of many companies provide that after the in- 
surance has been carried two, three or five years, according to 
the method of each particular company, the company will make 
liberal loans on the policies as collateral security, at a reasonable 



i 



AN INVESTMENT. 381 

rate of interest, usually 5%. Life insurance policies are also fre- 
quently used as security for loans from banks or brokers. Debt- 
ors are sometimes required by their creditors to 
Loans take out insurance for the benefit of the latter^, 

so that if the debtor should die, the debt will 
be provided for. 

Life insurance policies may be assigned the same as any other 
valuable asset. Unless payable to the insured himself or his es- 
tate, the beneficiary must usually join in the assignment, but 
the policies of many companies are so written that the insured 
may change the beneficiary under the policy at will without her 
consent or knowledge. Of course the company must consent 
to the assignment. 

The modern life insurance policies on limited payment life 
and endowment plans are so written, that in case the insured 
lives to the date of its maturity he will have a good 
an Investment ^^ investment. It must of course be understood 
that strictly investment insurance is written on 
an endowment plan. Take for illustration a 20-year endowment 
policy of $1,000 which matures for a little over $1,500 in cash 
at the end of 20 years, provided its profits will have been allowed 
to lie and accumulate. Such a policy will have made about 4% 
compound interest and furnished insurance for 20 years without 
cost. 

Stringent laws in nearly all the states regulate the character 
of the investments of the policy holders' money and safe guard 
his rights in so many ways that it is practically impossible for 
an old line life insurance company to fail. Every company is 
forced each year to lay aside a sufficient sum of money which 
compounded at a given and very conservative rate of interest 
will be sufficient to pay any guarantees contained in its policies. 
For instance, in the case of an endowment policy the amount 
laid aside each year must be sufficient when compounded either 
at 3 of 4:% interest according to the rate used to produce one 



383 LIFE INSURANCE. 

thousand dollars at the end of twenty years. The amount of 
assets is so enormous that the companies are able to hire 
the best financiers that are obtainable, each a specialist in his 
line, to handle and manage their vast interests. These men have 
a knowledge of how and where to invest money that the poor 
man or the man in moderate circumstances has no means of 
knowing. Insurance provides a way whereby the poor man can 
invest fifty or a hundred dollars a year to as good an advantage 
as the wealthy. It must not be assumed, however, that those 
in moderate circumstances are the only ones who invest in life 
insurance from either an investment or from an insurance stand- 
point, as our best and wealthiest business men are found to be 
the heaviest carriers of insurance. 

Originally when one failed to pay the premium promptly 
on the day it was due he divested himself of all rights and 
equities under his policy. Under the level premium plan, it 
must be remembered that the insured pays a higher rate during 
the first part of the term than the insurance actually costs in 
order to counterbalance any deficit which may arise in case 

he should live to an old age. Now if for any rea- 
vaiues ^^ ^^^ ^^^ policy is allowed to lapse, it is apparent 

that the insured has overpaid the cost of insurance. 
Out of this condition has grown the doctrine of the surrender 
values of life policies. In 1861 a law was enacted in Massa- 
chusetts called the "non forfeiture'^ law, requiring all companies 
to give extended insurance as a compensation to the insured in 
case of lap§e of policies. About this time the New York Life 
Insurance Company introduced a policy of whole life insurance 
paid up in ten years and inserted the condition that it could be 
surrendered after being in force for two years, for paid up whole 
life insurance for as many tenths of the original amount as full 
years' premiums had been paid. Other companies adopted the 
policy of allowing liberal surrender values in the form of in- 
surance. The next step was to make the surrender value payable 



i 



SURRENDER VALUE. 388 

in cash and this ea«me in 1880. Most policies^ after being in force 
for a period may now be surrendered for paid up insurance^, for 
a cash value or for a life or temporary annuity. 

As previously stated^ many policies now provide that at their 
maturity the insured may take an income for life instead of 
taking cash or paid up insurance. In England and some parts 
of continental Europe, the custom of purchasing annuities has 
been in existence for a very long time. In America, however, 
the custom has begun to grow only within a com- 
Annuities parativcly short time. An annuity is usually pur- 

chased by the payment of a lump sum to a life 
insurance company. The company issues a contract to pay a 
certain amount yearly to the annuitant as long as he or she 
may live, the annuity stopping at the annuitant's death. An an- 
nuity is also issued with the provision that if the annuitant dies 
before receiving the amount of his or her original payment back, 
the insured balance would be payable to the annuitant's estate. 
A large amount of insurance in this country is supplied by 
fraternal or assessment associations upon the plan of assessing 
all survivors pro rata in case of the death of a member. The 
success of this plan depends upon keeping the association sup- 
plied with constant accessions of new members who are young 
in years in order that as the policy holders attain greater ma- 
turity of years the average death rate may not 

Assessment i . n . • ' tx^^ 

Insurance ^^ mcrcascd SO as to cause an increase m the 

frequency of the assessments. For if the death 
rate increases the effect is to drive out the young members, pre- 
vent young and healthy lives from coming into the association 
and leave only the old and decrepit members who are unable by 
reason of their advanced years to obtain insurance elsewhere. 
Some of these fraternal associations are now accumulating a 
reserve, while others have adopted the plan of a graded assess- 
ment, increasing as the insured advances in years, in order to 
meet the increasing death rate. 



THE STOCK EXCHANGE. 



CHAPTER XLII. 
DEALING IN SECURITIES. 
INCOMES; INVESTMENTS; SPECULATION; GAMBLING IN STOCKS. j 

From the time when the first company was formed and its t 
capital represented by shares^ which were offered to the public, | 
or the first responsible government issued its obligations in the f 
form of bonds or promises to pay, the buying and selling of 
such securities may be said to have existed. Dealing in such 
forms of wealth is as natural, proper and legitimate as dealing 
in dry goods, or any other class of property. From buying and 
selling securities for the purpose of investment, 
Speculation in j^ ^^g ^j^jy ^ gj-^p j.^ ^^le period of Speculation in 

them. When the prospects of large gains made 
shares desirable, as in the case of the East India Company, the 
South Sea Company or Law's Mississippi Company, the price 
rose and speculation was active. When a time of commercial 
depression prevailed, or frequent and prolonged wars and inter- 
nal strife, unsettled or overturned governments, destroyed com- 
merce and made obligations unsafe, trading in securities natur- 
ally declined or ceased altogether. But as society advanced, and 
governments became more stable, with rights of property secure, 
companies began to multiply, and as securities increased, specula- 
tion became more common until, like every other employment, 
it became the principal or sole trade or occupation of a particular 
class of citizens. 

In his History of England, Macaulay says: ^^t was about the 
year 1688, that the word ^stock-jobber' was first heard in Lon- 

384 



LONDON AND PARIS. 386 

don. In the short space of four years a crowd of companies, 
every one of which confidently held out to subscribers the hope 
of immense gain, sprang into existence. Extensive combina- 
tions were formed and monstrous fables were circulated for the 
purpose of raising or depressing the price of shares.^^ The 
London Stock raania for speculation increased until in 1697 Par- 
Exchange liament passed an Act to regulate the business of 
Paris Bourse speculation in stocks. In 1773 the London Stock 
Exchange was organized and now occupies an old-fashioned 
building in Capel Court, opposite the Bank of England. It 
has a membership of nearly 5,000, with an entrance fee require- 
ment of 250 guineas. Its scope is broader than any other ex- 
change, since its location at the world^s financial center gives it 
a pre-eminence. Stocks in companies scattered all over the 
world are traded in, American, South African^ and Australian 
stocks being especially numerous and prominent. It is the inter- 
national market for stocks, and bears the same relation to the 
world of securities that the Bank of England holds to the finan- 
cial world. The Bourse, the great stock market of Paris, was 
founded in 1726. Its operations embrace chiefly European 
securities. Its agents are not allowed to trade on their own 
account. 

The great trading center of America is Wall Street, in and 
near which are grouped the financial interests which in a large 
measure support the N'ew York Stock Exchange. Securities 
from all parts of the United States are here listed and dealt in. 
There are stock exchanges in Boston, Chicago, St. Louis and 
other cities, but they possess chiefly a local character, being lim- 

^, ,, , ited almost whollv to the securities in their re- 

New York ^ -^ 

Stock spective localities. Each exchange has its rules 

Exchange ^^^ methods of doing business, but in a general 

way, they are similar and all are patterned more or less closely 
after the N'ew York Stock Exchange. Many brokers in these 
cities are also members of the New York Stock Exchange, and 



386 THE STOCK EXCHANGE. 

through this connection are enabled to execute orders for securi- 
ties not listed in their local exchanges. The membership of the 
New York Stock Exchange is limited to 1100 and the price of a 
membership or '^seat^' is very high^ ranging from $30^000 to 
$80^000^ depending upon the general condition of the speculative 
market. 

Widely different opinions prevail regarding the stock ex- 
change. It has been condemned as a gambling institution, 
which unsettles values and injures legitimate business, and on 
Different Views the other hand, it has been praised as a necessary 
the^stock^^ and commendable institution. Both of these 

Exchange opiuious are, in a measure, right, and both are 

partially wrong. As a market for securities the Stock Exchange 
is unobjectionable — is a great convenience to both buyers and 
sellers. Capitalists who do not wish to loan their money or 
invest in real estate may here buy securities which will produce 
a desired income, and others desiring to convert securities into 
ready money are brought into immediate communication with 
buyers through this instrumentality. The Stock Exchange pro- 
vides a place for the investment of savings. Not every person 
can invest in land or mortgages. These are limited in quantity 
and besides are beyond the financial capacity of most of those 
with small savings. Corporations are now numerous, and secur- 
ities, — both stocks and bonds — are so plentiful that they consti- i 
tute the chief form of investments. Bonds and stocks of ap- | 

proved quality have the advantage over real estate 
fnvesTment^^ ^^ being easily hypothecated as collateral for loans, 

or converted into cash by sale. The Stock | 
Exchange, therefore, in so far as it affords facilities for making ♦ 
legitimate investments, is an undoubted benefit to the business 
world, and an aid to the progress and development of the coun- I 
try. Were stocks and bonds not readily salable, investors would 
not buy them, and were this the case, great enterprises such as 
railroads, large manufacturing establishments, and the like could ^ 



PURCHASE OF INCOMES. 387 

not be constructed. In a recent treatise entitled ^^The Work of 
Wall Street/^ Mr. Sereno S. Pratt very aptly says: 

^^A stock market is an income market. It is a place where 
incomes are bought and sold. No one, it is true, goes to the 
Stock Exchange as he might to an insurance company, and, 
paying over the requisite amount of money, buys an annuity. 
Yet, essentially, the stock-market operation is the same. The 
stocks and bonds traded in on the Stock Exchange would be 
worthless unless they represented value, either present or pros- 
pective. Bonds and preferred stock generally represent fixed 

income. Common stocks represent speculative 
fiTcomer °^ income, — that is, income that may vary from year 

to year, according to the earning capacity of the 
corporation issuing them. If a company has no income and no 
prospect of earning one, its securities are worth no more than 
so much waste paper. It is true that the stocks of an insolvent 
company are often quoted in the market, but their value consists 
in the control of the charter, the franchise, or some other privi- 
lege from which it is believed an income may sometime be de- 
rived. Several months ago a list of 48 non-dividend-paying 
stocks was published whose average market price was 41, but 
every one enjoyed the prospect, immediate or remote, of future 
dividends. There could be no stock market if there were no 
incomes. In Paris an investor will say to his broker, ^^Buy me 
enough rentes to pay me an income of, say, 50,000 francs a year.^^ 
He goes into the market to buy, not rentes, but income. In New 
York the investor does not express himself so directly. He says 
to his broker, ^^Buy me $500,000 of bonds.^^ Now, what he is 
actually buying is not bonds, but the income the bonds will yield. 
Before placing the order he has calculated exactly what will be 
the income, taking into account the premium paid, the interest 
promised, and the duration of the bond. All investments are 
thus made on the income basis. 

From an investment to a speculation is only a short step. A. 



888 THE STOCK EXCHANGE. 

buys a share of stock or a bond^ pays for it^ and lays it aside in 
order to derive an income from it. That is an investment. B. 
buys a stock or bond and holds it^ expecting a rise in its value, 
when he may sell it at a profit. That is a speculation. B.'s 
transactions are perfectly legale moral, and in every 
Speculation way legitimate. Every dealer in dry goods, gro- 

ceries, or farm products, and a large proportion of 
those who buy land, buy with the expectation of selling again at 
a profit. Then again, one who buys property as an investment 
may find its market value so increased within even a very short 
time, that he concludes to turn his investment into a speculation, 
and sells, intending perhaps to buy another kind of property or 
investment. Thus we see by analysis, the operations of the 
investor, the merchant and the speculator are essentially the 
same in principle, and to condemn one is to condemn all. 

Is speculation a benefit to the business world? Would the 
business world be benefited if speculation were entirely prohib- 
ited and all stock exchanges and produce markets either wiped 
out of existence or restricted to purely investment transactions? 
Eadical and unthinking persons have declared emphatically an 
affirmative to this latter question. They have even introduced 
bills into legislative bodies for the abolishment of produce 
and stock exchanges. All advanced and progressive nations have 
their exchanges in which speculative transactions form a large 
part of the business done. By means of the trading, both specu- 
lative and for investment purposes, these exchanges act as bal- 
ance wheels upon prices. When prices advance, 
Is Speculation holdcrs bc^-in to sell, and when prices fall abnor- 

a Benefit ? ^ ^ ^ ^ _^ _ _ . 

mally low, buyers are attracted, and their pur- 
chases tend to raise the market price to its normal condition. 
Thus extreme fluctuations are in a measure prevented by specula- 
tion.* Then again, the experienced speculator having a prophetic 



♦This law is trodden under foot, when in the case of a "corner" a single 
individual or a coterie of operators temi)orarily buy up and control a particu- 
lar commodity and force its price up abnormally. 



SPECULATION. 389 

vision^ may see in the future a season of favorable conditions 
which will increase the market value of stocks. Accordingly^ 
he buys now^ thus raisings in a measure^, present prices^ and in 
the future he sells, his sale tending to supply the demand, and 
lower prices. His mission then as a speculator has been a benefit 
to others. Henry Clews, before a Legislative Committee in New 
York, said: ^^Speculation is a method of adjusting differences of 
opinion as to future values, whether of products or of stocks. It 
regulates production by instantly advancing prices when there 
is a scarcity, thereby stimulating production, and by depressing 
prices when there is an overproduction.^^ 

Speculators usually buy on a margin. Instead of paying for 
the stock in full, they virtually buy the stock on credit, leave it 
in the broker^s possession, and pay enough cash on the purchase 
to cover any possibility of a loss to the broker. Thus instead of 
buying fifty shares of stock at $100 each and paying $5,000 for it 
in full, the buyer pays down, say $10 on each share, or 10 per 
cent, of the par value as a margin, and is thus able to buy ten 
times as much, with a corresponding increase in profit if the 
market proves favorable. Since he expects to soon sell the stock, 
it is not essential that he should buy wholly for cash. Neverthe- 
less, it is an actual sale, and delivery of the stock to him is con- 
templated unless he otherwise disposes of it before delivery. 

The broker charges interest on the unpaid balance 
Buying on ^f f^^ purchasc moucy. Were buyers required to 

pay in full for all stock purchased, their transac- 
tions would be restricted to a comparatively small volume. They 
have the same moral right to use the credit system, as the retailer 
who buys of the wholesaler and pays part of the purchase price, 
the balance, perhaps, to be paid after a portion of the goods have 
been sold; or as the buyer of real estate who makes his first pay- 
ment and sells the property before the next payment falls due. 
It is true the buyer on a margin takes a greater risk than either 
of these, for his purchase is larger in proportion to his capital 



390 THE STOCK EXCHANGE. 

invested^ and if the market should go against him^ he might lose 
his entire investment. But he is a buyer on credit, the only dif- 
ference being that a greater degree of credit is extended to him 
on account of the custody of the property remaining with the 
broker as security. 

There is a point, however, where speculation degenerates into 
gambling. The feverish desire for sudden riches, and the fas- 
cination that attends the uncertainty of speculative operations, 
often lead men away from strictly legitimate transactions and 
they become reckless, — mere gamblers upon the turn of the mar- 
ket. The speculator is one who studies the condition of finance 
and trade, both present and future, with especial reference to 
their effect upon the stock market, and bases his action upon well 
drawn and conservative conclusions, shaping his course so as to 
meet conditions of the money market as he antici- 
stocks^"^ ^" pates them. He exercises the same judgment and 
discrimination that a wholesale merchant or 
banker employs in the conduct of his business. The gambler 
in stocks, on the contrary, makes no calculations, but ^^goes it 
blind,^' buying and selling merely on his impulse, and ^^trusting 
to luck'' for the result. His operations are not based upon a 
study of the future, but upon ^^tips.'' He makes no effort to 
control or meet future conditions. In short, he does not differ, 
so far as the intent is concerned, from one who puts money on a 
horse race or a throw of dice. No wonder such operators almost 
universally ^'^go broke'' sooner or later. 

Since the intrinsic value* of any given bond or stock remains 
practically unchanged from day to day, or gradually increases in 
value according as the company is prosperous or otherwise, why 
should the market value fluctuate so rapidly and radically, on 
'Change, is a mystery to many persons. Some of the most stable 



♦stocks and bonds have three values, viz.: par value, or normal value; 
intrinsic value, or real and inherent worth; and market value, or what it 
will bring when sold. These three values may be widely different. 



FLUCTUATIONS. 391 

and reliable stocks in well established companies, paying nearly 

•uniform dividends from year to year, flucturate in price on the 

market, to a surprising extent. Thus St, Paul 

Jl^'T^'^T''' railroad stock has been known to fluctuate $50 a 

tne Market 

share within a few months, with little or no change 
in its real earnings. A stock which earns five per cent, fre- 
quently sells for less than one which is earning four. This 
seeming inconsistency can only be explained as one of the results 
of speculation and the manipulations of the market by shrewd 
operators. Mr. S. S. Pratt, in illustrating this feature of the 
stock market, says: "A man owns a house from which he derives 
a net income of $1,000. The house is worth, say, $20,000, and 
the income of $1,000 is 5 per cent, on the investment. But if he 
had to sell the house quickly he might not find a ready pur- 
chaser, and would have to sacrifice the property, say, for $10,000. 
There has been no change in the actual worth of the house. It 
is in as good condition as before, and the income continues, but 
the price is 50 per cent, of its true value. Or, the owner of the 
property may find that a corporation wants it for some important 
purpose, and is willing to pay a big price for immediate posses- 
sion. In this case an urgent demand has advanced the price, 
although there has been no change in income. Let us carry the 
illustration further. Suppose the corporation wants the prop- 
erty, but wants it cheap, and is willing to wait a while for it. 
Thereupon it begins to manipulate the market for real estate in 
that vicinity. By various expedients it impresses the owner with 
the belief that the prices of property on the street are likely to 
decline, and that he had better sell for what he can get now, 
than wait and perhaps do worse.^^ 

Now, transfer the foregoing illustrations to the transactions 
on the stock market, and the reasons for many of the fluctuations 
in stocks will be apparent. The stock market is filled with 
shrewd men who study the present and future conditions of the 
market. They know in a general way, who hold certain stocks, 



392 THE STOCK EXCHANGE. 

and they endeavor to create conditions which will affect the 
market in their favor, — enable them to buy cheaply or sell 
dearly. If they can create an impression that will depress the 
price of a given stock in future it tends to depress it now. Some- 
times they sell stocks to create the impression that they are "un- 
loading'^ on account of an expected fall in price, while at the 
same time they are buying the same stocks secretly through 
another broker, taking care to buy more than they are selling. 
Just how far deception in stock manipulation can be carried 
without becoming dishonesty is difficult to determine, but open 
lying, such as spreading a false or malicious rumor in order to 
affect the market is considered disreputable, and beneath any 
gentleman both on the stock, as well as produce markets. A 
"corner^' is the extreme of manipulation, and consists in controll- 
ing practically all the stock of a kind, with the result of forcing 
those who are short to buy the stock at a fictitious price in order 
to fill their contracts. 



CHAPTEE XLIII. 

THE STOCK EXCHANGE. (Continued.) 
BROKER; BULLS AND BEARS; LISTING SECURITIES. 

The stock broker acts as the middleman in negotiating eon- 
tracts between buyer and seller, but in a legal sense is the agent 
of only one party to the transaction. Since the trader must rely 
very largely upon the advice of his broker, it becomes of first 
importance that the broker should be a cool-headed man, whose 
judgment concerning all matters relating to the stock market 

can be taken as accurate. The broker is supposed 
Broker°^ to keep himself thoroughly posted as to passing 

events in the financial and commercial world, both 
at home and abroad. His view must be a comprehensive one, 
and he must be able to recommend a wise course of action for his 
client, based upon his mature judgment of the future. The 
established brokerage charge is one-eighth of one per cent, upon 
the par value of the stock bought or sold, for either buying or 
selling, or one-fourth of one per cent, for what is called a ^^round 
trade,^^ consisting in both buying and selling the stock. Some 
brokers do a strictly commission business, while others combine 
this with trading on their own account. 

A ^^short'^ is one who has sold stock that he does not own, 
but which he hopes to buy, before time for delivery, at a price 
below that for which he sold. Since it is now to his advantage 

to depress the market in order that he may be able 
Bulls and Bears to fill his coutracts at a lowcr price, he is a ^^Dear^^ 

in the market, and his efforts are devoted to 
^^bearing^^ or pounding the price downward. When a ^"^short^^ 
has been able to buy enough stock to fill his contracts he is said 

393 



394 THE STOCK EXCHANGE. 



I 



to have ^^covered/' If he finds himself unable to cover except 
at a loss^ he may "liquidate/^ which consists in paying the dif- 
ference to the other party. A "long'^ is exactly the opposite of 
a shorty — one who has bought more stock than he had contracted 
to sell^ and is therefore anxious that the market should advance, 
in order that he may dispose of his holdings at a profit. He 
is, therefore, interested in tossing the price upward by every 
means within his power, and hence is called a "buU.^^ A ^^bull 
market'^ is one in which prices are advancing. A "bear'^ market 
is one in which prices are declining. 

A ^^put^^ is the right which a broker has by contract to 
deliver to another a specified amount of a stock at an agreed 
price within a specified time. If the market declines, the broker 
p^^g who has a "put^^ may buy the stock and deliver it 

Calls at a higher price, realizing the difference as a 

^P'*'^^' profit. A ^^calP' is the right to demand, or call for 

a specified amount of stock at an agreed price, within a fixed 
time. The owner of a ^^'calF^ is a bull. It is to his advantage to 
have the price advance, for then he may call his stock and sell 
it at an advance. A^^spread^Ms a combination of a put and a call. 
The holder of a spread has the privilege of delivering the stock 
at one price or calling it at another. For the privilege of a put, 
call or spread, a fee is paid by the broker who buys it, varying in 
amount, according to the value of the privilege as estimated I 
according to the condition and probabilities of the market. P 

Numerous terms in addition to those already mentioned have J 
been coined especially for the stock market. A ^^poinf' is one ! 
per cent, in the price of a stock or bond. The market is ^^steady'' 
Language whcu it holds its owu, ^^firm'^ when it advances, * 

of the stock and ^Veak'^ when it declines. A "^"^poor' is a com- * 

bination of operators acting together for a com- I 
mon end. A ^^blind pooP^ is one in which all the operators are ^ 
kept in ignorance of its operations except the one person who I 
manages it. The object to be attained is absolute secrecy. A | 



^ 



i 



LISTING SECURITIES. 395 

^Svash sale'' is a fictitious transaction made by two or more mem- 
bers who act in collusion merely for the purpose of giving the 
appearance of a rise or fall in the price of a certain stocky or 
swelling the volume of its apparent sales and thus influencing 
others to buy or sell. 

Listing securities consists in placing them upon the records 
of the stock exchange so that they may be traded in by members. 
Securities not thus recognized or listed cannot be the object of 
transactions upon the floor of the exchange. Listing stocks or 
bonds does not make the exchange a guarantor of their value, 
but is an evidence of their genuineness. Buyers 
Secur^ies must judgc for themsclves the value of the securi- 

ties which they purchase. By the operation of 
listings however^ the securities are required to pass an investiga- 
tion which in a measure establishes their character as reliable^ 
and thus to a certain extent protects the buyer. A corporation 
desiring to have its stock or bonds listed^ must file a written 
statement with the Listing Committee of the Stock Exchange, 
setting forth the fullest details concerning the company and its 
securities, — its name, date and place of organization, authorized 
capital, amount of stock, preferred and common, amount actu- 
ally paid in on the stock, amount of liability of stock holders, 
name and address of the Eegistrar, description of the assets of 
the company, detailed statement of the nature of the company^s 
liabilities, gross and net earnings for the past year if the com- 
pany has been in business that long, or a copy of the company's 
balance sheet for the previous year, also a description of the 
bonded indebtedness outstanding of the company, if an}^, names 
and addresses of the officers and directors, etc. Thus a full his- 
tory of the past, and a description of the present condition of the 
company is placed on record with the Stock Exchange Commit- 
tee, who, after due consideration, vote to refuse or admit the 
securities to the privilege of the Stock Exchange. With these 
safeguards, thrown around the market, together with the re- 



396 THE STOCK EXCHANGE. 

quirements usually added by the listing committee that a Trust 
Company shall act as trustee of the mortgage and registrar of 
the bonds^ if bonds are to be floated;, investors may deal in securi- 
ties with a large degree of confidence and safety.* Banks will 
accept listed securities as collateral more readily than others. 

No one but members are allowed upon the floor of the ex- 
change. All buying and sellings or agreements to buy and sell 
are made by oral contracts. The member making the offer 
specifies the number of shares^, the fractional part of the price, 
(such as f in case the quototion is 103f ) and the terms of the 
„ . - sale. When no amount of stock is named in an 

Buying ana 

Selling offer 100 shares of the par value of $100 each is 

understood. The terms of the sale are either 
^^cash/^ that is for delivery and payment upon the day of sale, 
^^regular" that is, delivery and payment upon the next business 
day following the sale; "at three days/^ which is for delivery and 
payment upon the third day following the sale, or for "buyers 
option^^ or "sellers option,^^ which is after three days and within 
60 days after the date of making the contract, at the option of 
the party holding the privilege or option. Under this form of 
contract the buyer, or seller as the case may be, has the right 
to call for the consummation of the transaction at any time he 
chooses within the limit of sixty days. 

Immediately after a transaction has been made between two 
members upon the floor of the exchange each is supposed to jot 
down a synopsis of it upon a small pad, which he carries for 
the purpose. From this imperfect record the entries are carried 
upon the books of the members and afterwards compared. It 
is very seldom that a member disputes his liability under the pad 
entry. If the stock is not delivered as per agreement, or not 
paid for upon delivery offered, the matter is reported to the 
proper officer of the exchange, who buys or sells the stock at the 
market price, in other words endeavors to carry out the agree- 
ment of the member who is in default, and whatever loss is 



MARGINS. 897 

entailed thereby^ or whatever the difference between the agreed 
price and the market price^ the one party has a claim against the 
other for its recovery. Stocks sold ^^ex-^dividend^^ do not carry 
the dividend to the purchaser. When the books of a corporation 
are closed and a dividend declared^ the dividend no longer goes 
with the stocky but just prior to the declaration of another divi- 
dend^ that dividend does go with the stock unless it is again sold 
ex-dividend. 

As previously stated, with the exception of purchases made 
for the purposes of investment, the bulk of the business of 
buying and selling stocks and bonds is done upon margins. The 
buyer does not pay for the securities in full, but buys them 

largely upon credit, paying probably ten or twenty 
Margins per Cent, of their value to the broker as a margin 

to cover any possible adverse movement of the 
market. The broker furnishes the capital necessary to purchase 
the securities and charges his customer interest upon their cost, 
over and above the amount of the margin in his hands. Thus, 
suppose A. desires to buy stocks worth $100,000. He deposits 
$10,000 with his broker, together with instructions to buy the 
specified stock. The broker is merely the agent of the cus- 
tomer and must carry out his instructions. The broker may 
advise his customer as to the best course to pursue, and his 
advice is usually valuable, since it is founded upon intimate 
association with the stock market, but the customer issues the 
actual orders to buy or sell. The broker protects himself from 
loss through fluctuations in the market by requiring a sufficient 
margin to be deposited. The amount of the margin will vary 
according to the character of the stock. While ten per cent, 
is ample margin in the case of most stocks, a larger margin may 
be necessary in some cases, and of this the broker is the judge. 
In case the market fluctuates to the limit of the margin, the 
broker calls upon the customer for -more margins. If the cus- 
tomer fails to respond, the broker sells the stock immediately in 
order to save himself from loss by a still further fluctuation. 



398 THE STOCK EXCHANGE. 

Stocks or other securities purchased by a broker for his cus- 
tomer must be paid for on delivery. But the customer has 
placed only a margin of perhaps 10 per cent, of the cost of the 
securities in the broker's hands. The remainder of the purchase 
money the broker must^ and does^ furnish. Suppose a broker 
buys 1,000 shares of stock at 120^ the whole amounting to $120,- 
000. The customer has deposited $12^000 as mar- 
tion^of Checks* S^^' ^Jie broker must furnish the remaining 
$108^000. Brokers are not rich men, and even if 
they were, they could not possibly furnish sufficient capital to 
buy all of the securities which a large brokerage business would 
require. The broker arranges with his bank for a loan large 
enough to supply the needed funds, the securities about to be 
purchased to be deposited as collateral. He extends credit to his 
customer and in turn gets credit from his bank. He extends a 
credit to his customer equal to, say 90 per cent, of the cost of 
the stock, and the bank extends a credit to him of, say 80 per 
cent, of the cost of the stock. Thus, the customer furnishes 
$12,000 of the purchase price, the broker furnishes $12,000 of 
his own capital, and the bank furnishes the remainder, $96,000. 
But the securities are not yet delivered to the buyer, and the 
condition of their delivery is the simultaneous payment of the 
money. The matter is arranged in this way: The broker has 
an understanding with his banker that the bank will over-certify 
his check temporarily. After certification the check is passed 
over in exchange for the stock, which is then sent to the bank 
as collateral for a loan large enough to make the account good. 
It is true, however, that banks will not over-certify checks in 
this way unless the character and standing of the broker ate 
such as to warrant implicit confidence in him. The broker must 
also carry a constant balance in the bank large enough to entitle 
him to such favors. 

It will thus be seen that over-certification of checks is an 
absolute necessity in stock transactions under the custom of buy- 



OVER-CERTIFICATION OF CHECKS. 899 

iiig .securilics on crcdil. or iiii(l(!r (Iki syslx.'in of ni}ir«i,ins. A 
clause ill IIk; NaiionnI I>aiik Acl Forbids I Ik; ovcr-cM'i-l ilical ion of 
checks by National hanks, and on accouni of (his rcsl rictlion 
(and others) 'I'rnsl (.Companies and private; hanks hav(; h(!('n or- 
^^anized in (-onsichirahle nunihcrs to iruict Ihe pnhiic needs. 

(Jail loans an; a fc^aturc; of stock tradin<;-, and are <'\tensively 
jnade from day to day, sul)ject to ^'sliarp call," whic-h means that 
uf)()n nolilication from the bank, to tin; horrow(;r, such loans 
shall h(; j-ej)aid before the (dos(; of banking' lioiirs of tin; same; 

business day. 1Mies(; loans ai'(! s(!cnr(Ml t)y stock 
Call Loans (collateral, and when stock loans arc; terminat(Ml by 

siudi notification the debtor is very likely (com- 
pelled to borrow other mon(3y in the open market, (which t(;nds 
to advance the rale; of inlerest on loans nj)on that parti(!iilar 
security) or to sell such s(;curiti(;s in tlu; opvn market, which is 
apt to de[)resH ils market pri(!(;, (;specially if it should be(;omo 
known to have; t)(;en cliRcredited as collal(;ral by the; trust com- 
panies. 

In hundr(;ds of ollices in (.^liica<i;o and olher citi(;s throu<^hout 
the country may be; seen lilth; tele;^raf)hic instrum(;nts call(;d 
"tickers,'^ through which runs a narrow j)a()er ribbon on whi(;h 

the; instrument prints automatically the names 
Tickers and priccs of stocks and bonds in abbr(;viated 

forms. These tickers, together with the* s(;rvice 
which tliey furnisli, are r(;nled to o(Ti(c(;s by the West(;rn Union 
n\;l(if,^rap}i (.V)mf)any, and as fast as sal(;s an; made; on tlu; New 
York Stock l^]xchange tlie tele<^raf)li conveys the information to 
the y)ublic by m(mns of these instruments.* 



♦The sumo device Ih used for the produce exchanges. 



THE PRODUCE EXCHANGE 



CHAPTEE XLIV. 

BOARD OF TRADE. 
CHARACTER; ORGANIZATION; MEMBERS; BENEFITS TO PUBLIC. 

The United States has never, thus far, been a great manu- 
facturing country. Its commerce and wealth are chiefly based 
upon the products of the soil. Its mining and lumbering in- 
terests have been small compared to its agriculture. It is the 
great food producing nation of the world. Eu- 
iiuer^e^tl"^^ ^^P^ ^^ dircctly interested in the success of agri- 

culture in the United States and is dependent 
largely upon American produce. The development of agri- 
cultural interests has been a potent factor in the growth and 
development of our cities. New Orleans became the greatest 
city of the south chiefly because the products of the cotton 
fields found their natural outlet there. Chicago had its growth 
in the fact that it is the center of a vast agricultural domain. 
Buffalo and other cities of the lower lakes assumed importance 
as the transportation of farm products by water to New England 
and the seaboard became a necessity. Later, Galveston in the far 
southwest, Minneapolis and Duluth in the northwest sprang up 
and became thriving cities because they were natural geograph- 
ical outlets for agricultural products of the expanding and 
developing west. Agriculture has also been the moving in- 
centive to the building of railway and steamship lines. It 
was to meet cargoes from the Illinois and Iowa prairies that 
the first railroad lines were pushed westward to the struggling 

400 



BOARD OF TRADE. 401 

trading center at the foot of Lake Michigan, — afterwards to 
become the greatest grain market in the world. 

The produce exchange is an outgrowth of our agricultural 
development. It is a carefully devised business system for 
handling, storing, and distributing annually millions of bushels 
of grain and millions of dollars worth of animal products in the 

form of meats, lard, etc., at important points 
Definition in the United States. It is a grain and produce 

market, the creature of our necessities as an agri- 
cultural and commercial people. It differs from a stock ex- 
change in that its members deal in realities, even though they 
handle nothing but warehouse receipts or promises to deliver, 
while the stock broker deals in the evidences of credit, or securi- 
ties which may or may not have a tangible value back of them. 

Produce exchanges are usually located in those cities which 
have important agricultural sections, tributary to them, where 
railroads center or where rail and water commerce have natural 

connections at a navigable port. The most im- 
Location portaut producc exchanges are therefore at the 

seaboard, on the lakes or on navigable rivers. On 
the Atlantic coast the exchanges are at Boston, New York, 
Philadelphia and Baltimore. On the Gulf of Mexico the princi- 
pal exchange points are New Orleans and Galveston, and on the 
great lakes are Chicago, Milwaukee, Duluth, Detroit, Toledo 
and Buffalo. St. Louis, Kansas City, Cincinnati and Minneapo- 
lis are examples of exchanges in close touch with producing 
regions but not having advantages of lake or ocean navigation. 
San Francisco is the most representative exchange point on the 
Pacific coast. These cities furnish the natural outlet for the 
distribution of the products of their several sections. 

Each exchange is a corporation controlled by a general or 
special charter under which its acts are legalized by the state 
in which it is located. It must be governed by certain officials 
elected from and by its members. These officials are usually a 



402 PRODUCE EXCHANCE. 

presiaent^ one or more vice-presidents, a body of directors and 
various standing committees to attend to the details of official 
business. Each exchange adopts for itself rules and 
th^Exchlnge^^ bj-laws which govern both officials and members 
in all their acts. These rules prescribe the 
requirements of membership, the terms and conditions under 
which a member may transact business, and provide rigid 
methods of discipline for violations of the laws of the exchange. 
It must be kept in mind that the exchange, as such, transacts 
no business — of a commercial nature, — does not receive or ship, 
buy or sell during its existence a bushel of grain or a pound of 
produce of any kind. It simply furnishes the facilities for 
trading to its members and so hedges them about with restric- 
tions that every contract made is binding under its rules and 
under the laws of the state and nation. Any digression from 
the strict letter of exchange law is promptly followed by a 
charge of uncommercial conduct and this by suspension, ex- 
pulsion or other penalty. 

The members of an exchange may be divided into several 
classes according to the special features of the business adopted. 
"Eeceivers'' are those who make a business of receiving grain 
or other produce direct from the country shipper. Their busi- 
ness is to carry out the instructions of the ship- 
Members and 'i.! • J. • XT * • 1 

their Privileges P^^ Cither m stoHug the gram m a warehouse or 
offering it for sale in the open market to the 
elevator owners who may wish to carry it to a future time, to 
the miller who may want wheat to grind, to the distiller, the 
brewer, the cereal company or perhaps the eastern shipper or 
exporter. ^^Shippers'^ are those who make it their business 
to arrange for the forwarding of grain to still other exchange 
points or to eastern distributers and consumers. ^^Carriers'^ 
give special attention to financing this class of property by 
supplying the necessary capital, furnishing storage, insurance 
and all needed protection until there is a demand for its ship- 



MEMBERS' PRIVILEGES. 403 

ment. This class of business has given rise to extensive sys- 
tems of private elevators. Public warehousemen are those who 
own or lease from railroads great storage houses the contents 
of which they generally do not own. They are required to issue 
warehouse receipts for all grain stored in such houses and the 
state, through a board of warehouse commissioners^ regulates 
the storing, carrying and delivery of this grain to its owners 
who pay a fixed charge per bushel to the warehousemen for the 
warehouse service. 

In the workings of the Produce Exchange no class of mem- 
bers occupy so prominent a place as Commission Merchants. As 
a rule they outnumber the grain receivers, the shippers, the ele- 
vator owners and the independent traders, who are without a 
commission business. Ordinarily the best class of commission 
merchants do not trade on their own account, but confine them- 
selves to the proper execution of customers' orders. For the 
handling of a trade in grain there is established 

The Commis- 1.1,1, i • • i 

sion Merchant ^J ^^^^ exchange a regular commission charge, 
usually |c a bushel for opening and closing the 
trade. The business is most profitable, when conducted on a 
large scale, the largest houses in the largest markets of the 
country frequently executing orders for m.any millions of bush- 
els of wheat, corn and oats in a day. This presupposes a very 
extensive office force, a big private wire system reaching to 
other exchange points and a wide acquaintance backed by a most 
excellent reputation for handling all orders instantly and accu- 
rately. Where a few houses of this kind exist in a large trading 
center there are hundreds of smaller concerns doing a limited 
business, but under the same rules and restrictions of the 
exchange. The first province of the commission man is to exe- 
cute orders in any or all markets on the exchange. He must 
know his customers, or the people who entrust him with orders. 
If he has not a personal acquaintance with his principal, (the 
man giving or sending the order,) he must have what is the 



404 



PRODUCE EXCHANGE. 



equivalent of personal acquaintance and confidence — a financm 
guarantee from the principal. i i ' 

This brings up the subject of margins or security on trades 
ordered. The favored commission house may have a number of 
customers whose financial prominence is such that they have 
carte blanche privileges at the order window. In such cases the 
commission merchant knows that whatever is bought or sold for 
such account is as ^^good as gold" without the scratch of a pen. 
This class of customers is the exception. For the ordinary 
trader the first step is to be properly presented to the head of the 

commission house as a reputable gentleman. The 
Margins sccoud rcquisitc is for him to deposit with the 

house such sum of money or certified checks as 
will cover ordinary obligations in the trade. Then his orders to 
buy or sell are carried out by the machinery of the fully equipped 
commission house. If his orders exceed in volume the credit he 
has with the house, the credit clerk is quick to notify him that 
more funds are needed. The rules of most exchanges permit 
the commission merchant, if any unusual action is taking place 
in the market, to call margins on trades to the extent of ten per 
cent, of the ruling value or price of the article bought or sold. 
As an example: The customer has wheat bought at 80 cents for 
a future month. Ten per cent, of this price is 8 cents. The 
commission man if he fears a bad break in the market may ask 
the trader to put up enough funds to protect the trade on a 
break of 8 cents or down to 72 cents. If the wheat is sold at 
80 cents and the market looks so strong that it may make a big 
advance, the margin is called the other way, — the trader putting 
up the funds to protect the house on a possible upturn in price 
to 88 cents. AVhen the market has covered half this ground a 
break of 75 cents or an advance to 84 cents, the commission man 
may again call for margins to the full limit above or below the 
ruling price. Thus, on a very excited market or during panicky 
conrlitions, margin calls on customers may come (hick and fast. 



MARGINS. 406 

The customer may feel that he can not or will not risk more 
money on his open trades and orders them closed at a loss. If 
customers do not respond to margin calls the house with the 
open lines on its book, may close the same for account of those 
whose margins are about exhausted. 

These are extreme* cases. The ten per cent, margin call is 
unusual. In the ordinary condition of trade from 2 cents to 5 
cents a bushel protection is considered sufficient by the commis- 
sion merchant. Naturally there are times when the customer 
can not be reached quickly or for some reason can not respond 
quickly enough and the commission house is caught in the gap 
between the wicked market and the tardy principal. 

Many students of business methods are apt to conclude that 
all transactions on an exchange are surrounded by some unex- 
plainable mystery. They readily understand that conditions 
such as drought, frost, excessive rain, etc., affect the year's 
output of produce, and the whole problem of 
TrL"eNews°" grain speculation is made up of factors as plain 
and simple. The speculator watches the crops of 
the world the year through. If the winter crops go into the 
ground in good shape it is the first promise of abundance for 
the coming year. If spring crops are seeded favorably and a 
large corn acreage is planted the probability of abundance in- 
creases. Everything else left out of the question, this farm 
prosperity starts the speculator selling months ahead. If the 
opposite is true — adverse seeding seasons, winter killing of wheat 
and wet weather delay in corn planting — the speculator begins 
buying on the theory of short supplies and naturally higher 
prices. Extend this system of observation so that it covers 
the importing countries of Europe — chiefly England, France 
and Germany — and the competitors of America in exporting 
supplies to Europe — chiefly Eussia, Danubian countries, India, 
Australia and Argentina — and you will find the commercial 
reason for ninety per cent, of the trading done on future con- 



406 PRODUCE EXCHANGE. 

tracts. If importing and exporting lands are promised short 
crops then very high prices for twelve months ahead are almost 
certain. If both importing and exporting countries have an 
over abundance promised^ prices are likely to be depressed. 
The speculator also takes into account the reserves on hand from 
the previous year. This is important whether these reserve 
stocks are at home or abroad. Weather conditions are watched 
every day of the year. Great crop promise may be changed in 
a night by a hard untimely frost, by hot winds, by excessive 
rains at harvest or by a widespread drought during the growing 
period. The perfection of the signal service and the weekly 
and monthly weather and crop reports furnished all exchanges 
by the agricultural department at Washington have become more 
and more an aid to the trade in shaping prices according to 
natural conditions. 

In a general way the Produce Exchange is a benefit to both 
producer and consumer. The first great benefit is in the ac- 
curacy with which the organized trade gathers and makes public 
valuable information about production the world 
Exchanges *^^ ovcr. Both producer and consumer can more in- 
telligently prepare for the future — the one by sell- 
ing quickly or holding on to his year's production as the con- 
ditions suggest, the other by making his contracts early for 
supplies or by holding off for lower prices as his judgment 
might direct. In the event of poor production at home the 
speculator is the best friend of the farmer. Long before the 
grain approaches harvest and perhaps months before the great 
American corn yield is to be gathered, the traders who watch 
every feature of crop development have advanced prices to a 
high level and the man who owns the acres is the first to feci 
the benefits. He may have less bushels to market but his 
crop loss is to a large extent made good by the markets made 
possible only by the Produce Exchange as here outlined. 



CHAPTEE XLV. 

THE PRODUCE EXCHANGE— Continued. 

CASH GRAIN; FUTURES; INSPECTION; BUCKET SHOPS. 

Although about ninety per cent, of the contracts made on 
any exchange are in *^^futures^^ there mitst always be the very im- 
portant basis of cash business. Without the actual property 
the contracts for future delivery would mean nothing and would 
have no standing in law. The main fea- 
Trading^*" turcs of cash trading will therefore be con- 

sidered first. A good portion of the trad- 
ing hall is generally given to what are termed cash grain sample 
tables. The grain house with a certain number of cars of 
wheat, corn, oats, rye, barley or flax seed on the railroad tracks 
for its disposal hastens to have samples of the same displayed 
on these tables. The samples are in small paper sacks, the 
contents of which have been taken from the cars when they 
were inspected on arrival. Each sack contains the name of the 
railroad line over which it was received, number of the car, the 
grade affixed by the official inspector, etc. When the samples 
are placed on the tables the grain is on the market. Around 
these sample tables gather the receivers who have grain to sell 
and buyers of all classes who wish to secure a share of the current 
receipts from the country. As suggested before, these buyers 
may include: First, elevator owners who want the grain to 
fill their houses for the profits in the storage; second, the millers 
or their agents buying wheat to grind; third, brewers and dis- 
tillers who wish corn or barley for manufacturing purposes; 
fourth, the agent of the cereal company who wants oats for his 
plant; fifth, the shippers who have need of grain of all kinds to 
fill contracts made with eastern distributers, with actual con- 

407 



408 PRODUCE EXCHANGE. 

sumers or with export interests contracting for supplies needed 
abroad. 

When the seller and buyer agree on a price for a single car 
of grain or for fifty cars^ as the case may be, the sample bag 
passes to the buyer. He can then direct the railroad having 
the cars on its tracks how to dispose of them. They may be 
ordered to a certain warehouse or mill or other 
tl^B^uylr ^^^^^^ plant to bc unloaded or they may be ordered 
switched to the tracks of some other road to be 
forwarded to the point for which the grain w^as purchased. 
These transactions repeated on each trading day of the year 
constitute the chief feature of the cash grain trade. 

Another important feature in the cash grain business is the 
delivery of grain in either private or public warehouses. Sales 
may be effected from private houses by samples or from public 
warehouses by the tender of the oflBcial receipt or certificate 
representing the grain when it went into storage. Usually sales 
made from storage houses are for larger amounts — possibly only 
25^000 bu., if some special lot of grain is desired — but more 
frequently 50,000, 100,000 or 250,000 bushels where the grain 
is to be moved out by rail or water in large quantities. In all 
these transactions the bill of lading, the certificate of the public 
weighmaster, and the official inspection certificate pass with the 
grain to the buyer who gives in exchange his check in full pay- 
ment. This closes the cash grain transaction. 

That part of the business of the Produce Exchange which re- 
ceives most notice by the press and the public is known as 
^^trading in futures^^ or speculation. Unreasonable critics of the 
system go so far as to call this feature of the business gambling. 
This phase of criticism was discussed in a previous chapter on 
the Stock Exchange, which furnishes a parallel case. 

Each member of a Produce Exchange can do business on his 
own account or he may execute orders for others inside or out- 
side the association. If he operates for others he does so on a 



CASH GRAIN. 409 

commission prescribed by the rules. He must in making a re- 
port of his trades to his principal state in certain written form 
with whom he made the trade in the open market, 
Futures '^ the time at which it was made and the price. 

If a member acting as a broker for a fellow 
member or as a commission merchant for an outsider makes 
ten or twenty or two hundred trades in a day the same exacting 
conditions attach to each separate transaction. It is the growth 
of such business that builds up, first the small commission firm 
and possibly, later, the great grain and banking house with 
private wires stretching out to other exchange points and pene- 
trating into the states tributary to the home exchange. 

The trader who sees in existing conditions on a certain day 
reasons for higher prices and operates with a view of advancing 
the market is called "a buU.^^ The trader who does the oppo- 
site is called a ^^bear.^' The entire trading body as well as the 
public, so far as it takes any part in the making of the market, 
is thus divided into bulls and bears as on a stock or 
Bulls and Bears cotton cxchange. If a man with money to in- 
vest or risk in a business transaction buys a vacant 
lot in a suburb and sells it a month or a year later at a certain 
advance or a certain loss he has engaged in what the trade and 
the public call speculation. 

It is a simple matter to apply the same attempt at profit 
making to the products of the soil. The grain trader goes into 
the open market where he meets hundreds of others and makes 
trades — makes contracts for future delivery — under the fixed 
rules of the exchange — in grain. He buys in midwinter or 
early spring on May contracts or in the summer or fall on 
September or December contracts. While he is 
fts Detail^" '" doing this another member has made a sale of a 
certain quantity of a specified kind of grain to be 
delivered m May, July, September or any other month. Long 
before the month named arrives, the man who had the grain 



410 PRODUCE EXCHANGE. 



1 

nfo wl 



bought — finding himself with a profit of several cents^, goes into 
the same open market and sells out a like amount. The mem- 
ber who sold originally finds the market several cents against 
him. He goes into the market and buys a like amount. The 
one draws down profits from the clearing house. The other 
puts his check into the clearing house to make good his losses. 
Both are even on the market. Both have engaged in speculation 
in its simplest form. 

Assume that the original trades stood on the books without 
any offsetting transactions until ^^delivery day/^ the last day of 
the month named in the contracts. Then at that date^ under 
the rules^ the buyer must be in a position to take the 5,000, 
10,000 or 50,000 bushels named in the contract and pay for them. 
He then has to deal with cash property and he 
Delivery Day has tumcd ovcr to him warchousc certificates call- 
ing for the actual property for which he must 
draw his cheek in settlement. The original seller, on the other 
hand, may tender the amount of grain named on ^^delivery day'' 
or he can deliver the same at fixed hours on any trading day of 
the month named in the contract. 

The member or house which for his own account or on 
orders from a principal continues to buy certain cereal for 
some future month on a large scale for weeks or months in ad- 
vance becomes a factor in the market to the extent perhaps of 
causing a marked upturn in the price. Those who have thus 
bought are termed in the principal ^^ongs'' or holders in that 
particular cereal on that exchange. Those who have sold to 
this large buyer or to others, day after day are termed ^^shorts.'' 
These latter may find the market going too much 
Shorts^" against them and through fear of heavy losses 

may switch suddenly to the buying side for pro- 
tection. This is called ^^covering,'' a performance which often 
adds great force to the buying side and results in a sharp ad- 
vance in the price for the time being. On such a swell in the 



LONGS AND SHORTS. 411 

price the large holders may reduce their lines at good profits 
or may continue to buy up to delivery day when they can demand 
the actual property. This condition may be reversed. The 
holder may find the market each day going against him. The 
sellers may grow bold, pressing the market lower until the longs 
are forced to abandon their position. If they sell out to prevent 
further losses it is called forced liquidation — just the opposite 
of covering by shorts. The short sellers^ with a decided ad- 
vantage in the market because of the decline, may buy back 
to offset previous sales or may continue short until delivery 
day when they are obliged under the rules to produce the 
property sold — having the entire month to make the delivery. 
This kind of trading gives rise to all the turns in prices in a 
speculative market. When carried to extremes it gives rise 
to violent fluctuations in prices by which smaller or more con- 
servative traders are greatly inconvenienced and often finan- 
cially injured. 

Following up the foregoing methods of trading a ^^corner" 
develops under certain conditions. A strong house or a group 
of leaders in the trade may decide that the wheat, corn or oats 
market is in a condition to be easily controlled and the price 
manipulated. The shipping demand for a certain cereal ha? 
reduced stocks. The country roads are bad or farmers too 
busy to market grain freely. Perhaps some injury threatens 
the growing crop and makes the country unwilling to part with 
reserves. If the warehouses contain but 3,000,000 bushels of 
the grade required to fill contracts and the man who contem- 
plates running a corner sees that another v,000,000 bushels is 

all the country tributary to the market is likely 
Corner to fumish, cvcu with the inducement of high 

prices, then his plan is to keep on buying until 
he has accumulated a line of about 10,000,000 bushels. Of this 
amount the sellers of 4,000,000 bushels will have the actual 
grain from the country and from the elevators to deliver when 



412 PRODUCE EXCHANGE. 

the month for which it is sold arrives. The sellers of the other 
6,000,000 bushels are caught ^^short.^^ They have sold what 
they can by no means deliver. If these shorts take alarm and 
rush into the open market to buy or ^^cover'^ for protection then 
the excitement begins. Prices may be advanced several cents 
in a single day. After prices are thus carried far above a 
natural level others of the short sellers may seek to make private 
settlements on large lines outside of the regular trading channels. 
There is a third and last resort for those who sell and can not 
deliver. They can default on their contracts and ask an arbitra- 
tion committee to fix a fair settlement price. It should be 
stated here that the laws of many states make the running of 
such a corner illegal. On nearly all exchanges, also, there is legis- 
lation against such operations. As a rule the man conducting a 
deal of this kind is fortunate to escape losses in the end as he 
has delivered to him such a volume of high priced grain that he 
may not be able to distribute and market it until the expense of 
storing, insuring and carrying the grain will offset the profits 
he may have secured in his settlement with the short sellers. 

One of the most important features of the exchange, under- 
lying both the cash grain trade and the transactions in futures 
is the matter of grain inspection. After the grain leaves the 
farm and is thrown upon the open market at an exchange 
point it becomes an element in the commerce of the world. 

Banks make loans on grain in transit and in store. 
iLTpection ^^ must Carry insurance in most of its travels 

from producer to consumer. Somebody must 
vouch for it. The man who goes around the world needs 
personal words of introduction and letters of credit. Grain — the 
chief product of American farms — must start on its way in the 
world of trade with a certificate to show its quality. Grain 
inspection is conducted not by the exchange but by the state 
in which the exchange is located. Thus, Missouri regulates 
inspection for St. Louis, Minnesota for Minneapolis and Illinois 



GRAIN INSPECTION. 413 

for Chicago. The governor of the state appoints a Chief 
Grain Inspector. This same official aided by a board of Eail- 
road and Warehouse Commissioners appoints a Supervising In- 
spector and as many assistants as the size of the railroad center 
and the volume of grain handled suggest. These assistants 
visit the railroad yards daily and by extracting samples from the 
interior of the cars of grain fix upon its proper grade. These 
grades usually range from No. 1 to No. 4 and below this it is 
classed as no grade or rejected. It is with the higher grade 
the greatest care is needed. Most exchanges specify that con- 
tracts may be filled with No. 1 or No. 2 grain.. If the state does 
its work well other exchanges and grain merchants the world 
over learn to accept its certificate of inspection without ques- 
tion. The state not only inspects grain as it is received, and 
before the samples are offered on the exchange, but it places in- 
spectors at warehouses to certify to quality of cargoes withdrawn 
from store for shipment by boat or rail to their destination. Mil- 
lions of bushels of grain are sold every month in the year to 
European buyers who rely on the grade given the grain at the 
American exchange point by the state inspectors. 

At times when sellers are making heroic efforts to rush grain 
to market to fill large contracts it is often of the greatest im- 
portance to have the receipts grade No. 2 instead of No. 3. The 

one certificate will make it deliverable on a con- 
Grlde^* ^ tract made on the exchange, the other will not. 

Growing out of this emergency, in attempting to 
make grain good on contracts, there has grown up at each ex- 
change point a system of private elevators equipped with ma- 
chinery for cleaning and drying grain to raise its grade. It is then 
passed to a public elevator, is again inspected and may be deliv- 
ered on contracts. What is known as ^^kiln dried^^ corn is very 
desirable in commercial circles at certain months in the year — 
especially the germinating season — when corn containing 
moisture cannot be shipped long distances without heating or 
sprouting. 



414 PRODUCE EXCHANGE. 

Before concluding this discussion of the Produce Exchange 
it may be proper to refer to a species of gambling conducted 
under the semblance of grain tradings and known as the oper- 
ation of '^^bucket shops/^ 

The bucket shop is an imitation of the commission house. 
The one is an outlaw in most states in this country, the other 
as legitimate as filling of orders for coal, lumber or merchandise. 
The commission house fills orders entrusted to it in the open 
market, where every purchase or sale has its effect in making the 
prices, on which producers sell their crops and consumers both, 
domestic and foreign base their purchases. Every sale contem- 
plates delivery and every purchase contemplates the ability of 
the buyer to take the actual property on delivery 
Bucket Shops day. Buckct shops generally secure their quota- 
tions, (which they mark up on a black-board,) 
from the exchange by trickery. They never create a quotation, 
except it be a false one to get the best of an innocent customer. 
The bucket shop system is to take the wagers of its victims on 
the next turn in the regular market, the money passing over the 
desk as if betting on a horse race. Most trades are made on 1 
cent a bushel margin and the bucket shop deducts its -Jc or ^c 
a bushel from the price when the outsider makes his bet. It is 
a gamble pure and simple on what the market is about to do. 
ISTo bucket shop ever controls a bushel of grain, ever makes a 
delivery or fills an order in the open market unless for protection. 
Nearly all the highest state courts and the United States Su- 
preme Court have ruled in test cases that regular exchange 
methods are proper commercial transactions while the bucket 
shop is declared an evil. 



STORAGE AND WAREHOUSING. 



CHAPTEE XLVI. 

BONDED, PRIVATE AND COLD STORAGE WAREHOUSES. 

IMPORTATION OF GOODS; CLASSES OF BONDED WAREHOUSES; 
RESTRICTIONS; COLD STORAGE SYSTEM. 

It is frequently not convenient for an importer to pay the 
duty upon an invoice of foreign goods immediately upon their 
arrival. He may have imported the goods to meet a demand 
several months later. He imports the goods when he can get 
them or when he can buy them to advantage, and holds them 

until the demand for them arises. Many foreign 
warlhouses articles^, such as the laces of Switzerland or the 

rugs of Persia are made in the cottages or homes 
of the people. These are bought up by middlemen who go about 
collecting them, brought down to the seaport and there disposed 
of to American buyers who purchase for our market. Such 
purchases must be shipped to America at once. Even in coun- 
tries where the factory system prevails it is often necessary for 
our merchants to place their orders far in advance of the demand. 
This of necessity requires large capital, and as the duty is a con- 
siderable item, it is a great convenience to merchants to be able 
to leave the goods in the hands of the Government without pay- 
ment of the duty until they are needed for sale. 

A bonded warehouse is one designed especially for the stor- 
age of imported goods awaiting payment of the duty by the 
importer. Such warehouses are frequently owned by private in- 
dividuals, but are constructed under the supervision of the Gov- 

416 



416 STORAGE AND WAREHOUSING. 

eminent and are fire-proof. They are under the absolute control 
of the Government and are isolated from other buildings. A 
Government officer known as storekeeper is in charge of each 
warehouse. He is held responsible for the records 
storekeeper and safc-kecping of the contents. No goods can be 

delivered from the warehouse without a written 
permit from the Collector of the port;, which must be presented 
to the store-keeper. He checks all goods into the warehouse, 
and when a permit for delivery is presented^ he checks out the 
goods needed by the importer. Goods may be left in a bonded 
warehouse three years without payment of duty. 

Bonded warehouses are^ for convenience, divided into several 
classes. Class 1 consists of warehouses owned or leased by the 
Government and are known as General Order Stores. This class 
is the receptacle for all unclaimed, abandoned or seized merchan- 
dise, the owners of which have not complied with the law. Class 

2 is for the special and exclusive use of the firm or corporation 

owning it. It is usually located near the business 
Classes housc of the firm, and contains no goods except 

theirs. It is in charge of a government store- 
keeper and subject to the same restrictions as other warehouses. 
Its entrances and exits are separated and its keys are held by the 
store-keeper who checks the receipt and delivery of goods. Class 

3 is for the general storage of goods in bond. Any importer can 
store his goods in Class 3 warehouse. 

When the goods are landed at a port of entry the merchant 
to whom they are consigned gets notice of their arrival, and if 
he does not desire them for immediate consumption he enters the 
goods for the bonded warehouse, or if they are in a warehouse at 
some port, he enters them for re-warehousing, gets a permit to 

transport them to the warehouse near to his busi- 
GoodT**^ ^^^^ home, and without paying duty transports 

them to his home port and places them in a bonded 
warehouse, almost as convenient to him as his own store, and 



MANUFACTURING BONDED WAREHOUSES. 417 

there he may allow them to remain until his customers call for 
them. When the goods are received at the bonded warehouse 
the storekeeper inspects the condition of the packages, opens an 
account with that merchant and enters the number of the bond 
on his book with the number of cases and marks on the same, to 
await the pleasure or wants of the owner. 

A merchant may withdraw a portion of an importation by 
paying the duties upon the goods covered by that consular in- 
voice. Usually merchants have their foreign or- 
rPorUoT"^^ "^^ ^^^^ made up- into convenient consular invoice 
quantities, so that in case it is desired to withdraw 
a special class of goods, it is not necessary to pay the duties on a 
large quantity of other goods. All goods not withdrawn from the 
bonded warehouse in the three years, are considered abandoned, 
and are sold at public sale. 

An American manufacturer may bond his factory to the Gov- 
ernment* so that it will be possible for him to import raw mater- 
Manufacturing ^^^^^ manufacture them into a finished product, and 
Bonded ship thi? to 3. foreign country without the payment 

of any duty upon the raw material. His factory 
would then be called a manufacturing bonded warehouse, and 
would be subject to the same regulations as other bonded ware- 
houses.t 

PRIVATE WAREHOUSES. 

Ordinary warehouses are denominated free, or private, to 
distinguish them from bonded warehouses. The Government 
has no control over them. They are for general storage pur- 
poses, or for that of imported goods on which the duties have 
been paid. Manufacturers frequently have occasion to store up 



♦He may furnish the Government with a bond as security, and submit to 
the regulations. 

fA manufacturer may pay the duty on raw material imported, manu- 
facture it into a finished product, ship this to a foreign market and receive a 
refund of the duty paid on the raw material, under certain restrictions. 
This refund is called a "draw back." 



418 STORAGE AND WAREHOUSING. 

their products to meet the demands of the season when such 
goods are salable. Wholesale houses frequently carry in ad- 
dition to their regular stocky large quantities of 
wrr^^hou^sfs"*^^ merchandise in store, especially when confident of 
a rise in price. Goods seized under writs of replevin 
or attachment are stored awaiting judicial sale. Furniture and 
valuables are stored awaiting shipment or use, etc. Free or 
private warehouses are owned and conducted by private individ- 
uals as a business. The rates are less than in bonded ware- 
houses, as the business is free from Government restrictions, and 
are based generally upon the space occupied in cubic feet. The 
warehouse receipt given by a private warehouseman is an assign- 
able instrument and may be used at the bank as collateral secur- 
ity for money borrowed, or in many instances warehousemen 
make advances to the extent of one-half or three-fourths of the 
value of the property stored, charging interest at ruling rates. 
Perishable goods, of course, do not find their way into bonded 
or private warehouses. They are placed in cold storage. 

COLD STORAGE WAREHOUSES. 

Out of the development of our modern domestic and foreign 
commerce and transportation systems has come the cold storage 
warehouse. By means of cold storage the preservation through- 
out the entire year, of meats, fruits, poultry, dairy products, fish 
and vegetables has been accomplished to such an extent that the 

seasons have become practically eliminated, and 
Cold storage the priccs ,of thcsc necessaries of life have been 

made uniform. In the season of abundance, in- 
stead of becoming a glut on the market, these products are placed 
in cold storage and preserved until trade conditions will warrant 
placing them on the market. Cold storage warehouses are con- 
structed with specially built walls of great thickness, containing 
insulating material such as asbestos, cork, charcoal, shavings, 
etc., and every precaution is taken against the admission of out- 



I 



COLD STORAGE. 419 

side heat. Formerly cold storage products brought a lower price 
in the market than those that were fresh, but under improved 
cold storage methods they now bring as high a price in the 
market and in some instances even higher. Eggs stored in 
March and taken out in November, sell as high as the fresh com- 
modity. Eggs have been kept two years and found perfectly 
sweet when used. Five or six months is the usual period of 
storage with most products. 

It is estimated by a reliable authority that products worth 
over $500,000,000 are placed in cold storage annually, in the 
United States. Thousands of tons of meat are stored for pres- 
ervation awaiting distribution; between three and 
United staters ^^^ million cascs of cggs find their way into the 
cold stores each season; between one and one-half 
and two million 60-lb. tubs of butter, besides large amounts of 
oleomargarine, are stored; some two to three million barrels of 
apples are put in the cold rooms each fall, as well as great 
quantities of other produce, including vegetables of all kinds, 
molasses, tobacco, silks, .furs, upholstered furniture, etc.* 

The greatest center of the cold storage industry up to 1902 
was Chicago, it having long been the greatest railroad center 
and center of supplies, and, being the first to engage extensively 
in the cold storage of eggs, became the egg center of the country, 
more than 600,000 cases of 30 dozens each finding 
center*°^^^^ their way into the Chicago coolers each spring. 
The greatest center, if Jersey City and Newark, 
N. J., are included, is New York, partly because of the vast local 
market and also because of her great export and import trade in 
perishable goods. 

Fish freezing and storing warehouses are now found in all 
parts of the United States, including Alaska, as well as Canada 



♦These latter articles are placed in cold storage to protect them from 
insects. The leading retail dry goods houses in our large cities provide cold 
storage rooms for such articles, for their own as well as their customers' 
accommodation. 



420 STORAGE AND WAREHOUSING. 

and foreign countries. The great fish freezing and storing 
houses in Washington^ Oregon and Alaska^ handle many millions 
of dollars worth of fish annually. The fish are mostly halibut^ 
salmon and herrings and are frozen alive as caught, by placing 
them in cold storage warehouses, from whence they are shipped 

in refrigerator cars to the Atlantic cities and to 
^^^^ Europe. Cold storage of meat has reached its 

greatest development in Great Britain, as that 
country imports 60 per cent, of its meat supply. Vast quantities 
are shipped from the United States, and besides a fleet of nearly 
two hundred vessels is constantly engaged in carrying meat 
from Australia, New Zealand and Argentina to England, the 
meat being first frozen, and then kept frozen throughout the long 
voyage across the tropics, in the cold storage holds of the ships. 
By experiment it has been ascertained that certain tem- 
peratures are best suited to the preservation of certain products 
and in a well regulated warehouse it is comparatively easy to 
maintain at all times the temperature best suited to the purpose. 
Thus a temperature near the zero of Fahrenheit best preserves 

fish, butter, ice cream, etc.; 20"" to 28° furs and 
Temperatures fabrics; 30° to 32° cggs; 31° to 33° appleS;, fresh 

meat or cheese; 34° to 36°, pears, peaches and 
other delicate fruits, vegetables and the retarciing of plant growth 
in flowers out of season. All these varied temperatures are main- 
tained in different rooms of the same warehouse at the same 
time. 

The introduction of the refrigerating machine in 1890 gave 
the first great impulse to the establishment of commercial cold 
storage warehouses. Prior to that time ice and salt were the 

only means of securing the desired temperature, 
Mach1nT^°^ and this method is still in use to a small extent, but 

it is accompanied with serious objections, such as 
the carrying away of the moisture from the melting of 
the ice, the difficulty of obtaining sufficiently low temperatures 



ARTIFICIAL PwEFRIGERATIOX. 421 

or of keeping them under absolute control at all times, and, 
especially in the south, the excessive cost of the ice required. 
All these objections were overcome by the introduction of the 
ammonia or carbonic acid refrigerating machine. Liquid an- 
hydrous ammonia, which can only be kept so under pressure, 
when allowed to expand into a gas, absorbs heat. The refrigerat- 
ing machine simply reconverts the gas into a liquid to be again 
expanded, absorbing more heat, again liquefied and again ex- 
panded the process being continuous so long as the machine 
continues in operation. 

The charges for cold storing vary greatly, and only on the 
most staple goods are charges anything like fixed. Apples 

usually pay 15c. per barrel for the first month 
Charges and lOc. per month thereafter. Butter for long 

storage in zero rooms at about l/8c. per lb. per 
month, at 5° below zero at l/6c. per lb. per month. For eggs the 
charge is about 10c. per case per month or 40c. for the season, 
May to January. The ordinary charge for storage of furs is: for 
muffs 75c. to $1.00 and for fur capes or garments $1.00 to $2.50 
for the season of eight or nine months. 

The cold storage warehouseman, in addition to receiving 
goods from others for storage, is often a purchaser and owner 
of a considerable portion of the goods he stores. In Europe 
generally, and in this country to a small extent, negotiable ware- 
house receipts are issued for these goods and used as collateral 
Warehouse ^^^ loaus. The Icsscr usc of these instruments of 

Receipts as credit in this country is due, partly at least, to 

^^"^^^ ^ the absence of any definite system of inspection 

and of licensing and hence the lender depends largely upon his 
faith in the integrity of the individual warehouseman. The 
very fact that the goods are termed ^^perishable^^ casts suspicion 
upon them as security for loans even though they may be of 
the most staple character and as safe as any personal property. 
Insurance is a serious problem for the cold storage ware- 



432 STORAGE AND WAREHOUSING. 

houseman^ as a slight damage by fire to the refrigerating ma- 
chinery might cause enormous damage to the 

Insurance goods storcd; hcncc insurance companies have com- 

pelled the warehouseman to become a co-insurer 

or pay additional premium on a "consequential damage'^ clause 

in the policy. 



TRANSPORTATION BY RAIL. 



CHAPTER XLVII. 

RAILROADING. 

RAILROAD OWNERSHIP; CAPITALIZATION; TRAFFIC ASSOCIA- 
TIONS; POOLING; DIFFERENTIAL RATES; ETC. 

In 1830 there were thirty miles of railroad in the United 
States. This had increased to 9,000 miles in 1850, to 53,000 in 
1870 and to 192,162 in 1900. The total railroad mileage of the 
world in 1900 was, approximately 445,000 miles, with a capital- 
ized value of $35,000,000,000, and of this the United States 
possessed 42 per cent. — nearly half. The railroad property in 
the United States in 1900, consisting of track, rolling stock, 
depots, shops and other buildings aggregated nearly $12,000,- 
000,000. This enormous creation of property and development 
of transportation facilities has been the product of seventy 
years^ effort and progress, all growing out of the application of 
Development stcam powcr. The wide area of the United States 
of Railroad will explain in a measure the enormous mileage of 

ransportation ^^^ railroad systems. The European countries 
being of smaller area have shorter railway lines, and yet it 
should be remembered that the United States has the largest 
mileage in proportion to population of any nation. For every 
10,000 inhabitants in the United States we have 26.1 miles of 
railway; England, Scotland and Ireland, 5.2; Germany, 5.6; 
France, 6.6; Eussia, 2.2; Spain, 4.2; Brazil, 4.7; and Argentina, 
19.6. 

The enormous development of our railway interests has been 
the means of accelerating the commercial progress of the 

423 



434 TRANSPORTATION BY RAIL. 



4 



United States to a wonderful degree. This development has 
not only been typical of the evolution of industrial organiza- 
tions in this country^ but in a large degree has assisted in bring- 
ing about the wonderful industrial advancement which has been 
made in the past fifty years. By means of the improvement in 
transportation facilities our industrial and social 
Evolution ^^^^ ^^^ been revolutionized. Producers have had 

their market widened until it is now almost a 
world market^ whereas before^ the sale of many articles was 
restricted to the localities in which they were produced. The 
consumer likewise has a world market in which to buy. He 
is not confined to his home production. The prices of all the 
utilities of life are more nearly uniform^ since improved trans- 
portation has given them a better distribution. The variation 
in prices due to situation has been lessened. Improved trans- 
portation has also lessened the general prices of commodities, 
since it enables either raw or finished products to be moved 
cheaper, thus reducing the item of transportation which enters 
into the final cost of the goods. It also enables the merchant 
to ^^turn over^^ his stock or capital quicker and oftener and 
thus do business at less expense and hence at a smaller gross 
profit. 

The development of transportation has also been the cause, 
in a large measure, of the growth of our cities, since it enables 
manufacturers to locate their plants in the great centers of 
population where there is an abundant supply of labor, and 
where shipping facilities are favorable, irrespective of the loca- 
tion of the raw material. The steel mills of Chi- 
Agricuiture ^^§^ ^^^ Milwaukee are examples of this, being 

situated at a considerable distance from the ore 
and coal, but near populous centers. The location of great in- 
dustrial plants in or near towns or cities adds to their financial 
and commercial importance, and this in turn assists in their 
growth. I^ew agricultural districts have been opened up and 



RAILROAD OWNERSHIP. 425 

profitably cultivated^ through the facilities for disposing of the 
crops, afforded by improved transportation, while other districts 
have been abandoned or changed to grazing land, on account of 
the competition of more productive localities. Thus Massa- 
chusetts has practically ceased to produce wheat, and now re- 
ceives its food products from the west in exchange for its 
manufactures. 

The railroads of the United States are owned and conducted 
almost entirely by private corporations. The majority of the 
railroads of Germany belong to the government, and those of 
most other European nations, except England, 
Ownership ^^^ uudcr the direction and control of the gov- 

ernment. The advantages in favor of government 
control are, that the system of transportation will be operated 
at actual cost, thus saving to the people as a whole the profits 
which otherwise would go to private individuals, and that the 
power and control of the government will be extended and en- 
larged. This latter may be desirable in a monarchy, where the 
hand of the government is constantly upon all of its subjects. 
The Koman Empire built extensive roads as a means of extend- 
ing and solidifying its power. In a republic, however, the same 
reason scarcely exists. The reasons against government control 
are that we prefer to check, rather than extend, the power and 
influence of our government; that private enterprise supplies 
every demand for transportation facilities, and builds competing 
lines which would not be built if our railroads were all under 
government control; that the tariff rates for both passenger and 
freight traffic are reasonable, and are made under government or 
state restrictions. 

The average capitalization of the railroads in 
Capitalization the United States is lower than that of any other 
country, being about $60,000 per mile. This in- 
cludes costly bridges, such as those which span the Mississippi 
river, tunnels through mountains or beneath cities^ such for 



426 TRANSPORTATION BY RAIL. 

example as those under St. Louis or Baltimore^ besides numer- 
ous examples of costly expenditures in the execution of difficult 
feats of engineering and construction. The English railroads cost 
$200,000 per mile, those of France $128,000 per mile and of 
Germany $105,000 per mile. This difference in cost between 
American and European railroads has been ascribed to various 
causes, but is no doubt due largely to the more permanent and 
costly character of European roads. Perhaps more water in 
the stock, items of general expense such as the cost of floating 
the bonds, interest on the capital while the roads are under 
construction and profits of construction companies, are included 
as a part of the cost of European roads. 

Inventions and improvements during the past twenty-five 
years have steadily increased the efficiency of the railways and 
made the transportation of both passengers and freight not only 
more rapid, but safer and more economical. The substitution 
of steel for iron rails, made possible by improved processes of 
manufacturing steel, the use of heavier rails — 
Efficiency morc than 120 pounds to the yard in some in- 

stances — ^heavier cars, air brakes, automatic 
couplers, block signals, all have combined to improve the effi- 
ciency of our railway systems. 

Another condition which has contributed powerfully towards 
the general efficiency of the railways of the United States dur- 
ing the past third of a century has been the consolidation of 
companies and concentration of management. The early rail- 
way companies were small, and their lines were 
Consolidations short with Varying regulations and tariffs. Be- 
tween Buffalo and Albany in 1850 there were 
seven different companies operating, resulting in great incon- 
venience to both passengers and freight traffic. The small 
companies have nearly all entered into combinations, or been ab- 
sorbed by large companies, until the railways lines of the coun- 
try are now combined in a few great systems, with thousands 



CONSOLIDATIONS. 427 

of miles of tracks such as the Pennsylvania^ New York Central 
and Santa Fe. As an example, the Pennsylvania system now 
comprises over ten thousand miles and is composed of nearly two 
hundred small railway lines. Many of these were purchased 
outright by the Pennsylvania Company and absorbed into the 
system, while others are operated as subsidiary corporations. 
This great system transacts one-eighth of the entire railway 
freight and passenger business of the United States. 

Eailway associations and agreements in regard to the main- 
tenance of rates, character and conditions of service to be per- 
formed, classification of freight, interchange of cars whereby 
shipments between roads can be made without transfers from 
car to car, establishment of rates, etc., have tended to further 
develop the efficiency as well as economy of our railways. The 

causes which brought about the organization of 
Assodations railway traffic associations were the necessity for 

co-operation, through tickets and through bills 
of lading, the interchange of cars with connecting lines, so that, 
for example, a car load of grain could be shipped from Minne- 
apolis to the seaboard without change, and the necessity for the 
regulation of competition. As a result we have claim associa- 
tions, car-service associations, passenger associations and other 
organizations for the adjustment of all questions arising in 
each department of railway service. The organization of small 
companies into large ones and the consolidation of lines led to 
violent competition and rate-cutting during the ^7G's, and was 
finally overcome by the associations referred to. 

From the organization of railroad associations it was an 
easy step to ^^pooling,^^ which consisted in dividing the total 
earnings of several competing lines according to an agreed basis 
irrespective of the amount of business actually done by the 
different roads in the pool.* The organizing genius of Mr. 



♦The dangers of a pool lie in the arbitrary power which it places in the 
hands of a few men, to fix rates, control traffic and exercise a monopoly 
which affects business interests extensively, but in this there is a reliej. from 



428 TRANSPORTATION BY RAIL. 

Albert Fink first developed the railroad pool. He organized the 
Southern Eailway and Steamship Association (1875) in which 
were included nearly all of the railroad systems of the south be- 
sides several connecting steamship lines. The 
Pooling object of this pool was to settle what portion 

of competitive traffic each line should carry^ 
and those which carried more than their share were re- 
quired to pay their rivals the excess receipts less the bare cost 
of carrying. The ^^pooling^^ feature was more or less a promi- 
nent one in nearly all railroad association agreements until pro- 
hibited by the Interstate Commerce Act.t 

The earnings of the railroads of the United States for freight 
traffic are much more important than those for the passenger 
service, being about three times the amount received for passen- 
ger business. In some parts of New England where the popu- 
lation is dense, the passenger receipts may equal the freight, but 
a large portion of the freight of the country is hauled consider- 
able distances, and the earnings are correspond- 
Freight Traffic iugly great. Our principal grain fields are 1,000 
to 1,500 miles from the seaboard, and hundreds 
of miles from the. great commercial centers; our mines and for- 
ests are situated long distances from the coal beds or the fac- 
tories. The fruit from California and live stock from the 
great plains of the west are carried to the Eastern market. This 
movement of great quantities of bulky freight long distances 
results in large revenues for freight traffic while the distance dis- 
courages passenger travel. 

Eailway freight rates in the United States average but a cent 



the evils of the competitive system with its rate wars and destruction of 
profits which should accrue to stockholders or be used for the betterment of 
the road. 

fThe Interstate Commerce Law was passed by Congress in 1887, after 
fifteen years of agitation nnd investigation. It proliibited unreasonable rates 
and unjust discriminations, between persons, places and classes of traffic, 
prohibited pooling agreements, provided penalties for violations of its pro- 
visions and established a commission of five men to enforce its requirements. 



COST TO CONSUMER. 429 

and a quarter per ton per mile.*. This is lower than any other 
nation and probably not more than half what it was thirty 
or forty years ago. Improved machinery^ Bessemer steelt and 
competition have caused a steady decline in the rates. This 
decline has been accompanied by a general lowering of the 
prices of the most important articles of traffic, and would have 

been even greater but for the fact that it was made 
Consumer ^^ ^^^ ^^^^ ^^ stcadily advancing wages for labor. 

In the case of most commodities the public will 
buy and use a given quantity at a fair price. If then the price 
is lowered, the quantity consumed will be increased, or if the 
price is raised, the quantity will be diminished. Transportation 
charges are properly regarded as a part of the first cost of all 
those commodities which must be transported from the producer 
to the consumer. The consumer always "pays the freight^' as 
well as the profits of the middlemen, in addition to the original 
cost. Each producer, then, who desires to extend his business 
or increase his sales, perceives at once that it is only necessary 
for him to secure lower rates on his shipments. Any concession 
in rates cheapens tlie cost to the consumer and increases the 
volume of sales. Whether certain articles shall be sold in a 
given locality often depends upon freight rates from two com- 
peting points. Whether salt from Michigan or from Kansas 
will be marketed in St. Louis depends upon the freight rates be- 
tween these two localities and St. Louis. Whether shoes made in 
Chicago can be sold in Pennsylvania in competition with eastern 
shoes, depends upon the freight rates. A persistent pressure is 
being constantly brought to bear upon the railroads by both 
shippers and consumers to secure a reduction of the transporta- 
tion charges in order to extend sales or reduce the cost of pur- 



*Our average passenger charge is 2.35 cents per mile, while that of most 
European countries varies from 1.3 to 2 cents. 

fPrice of Rails Per Ton— 1868 1872 1876 1880 1884 

Bessemer steel 158 112 59 67 31 

Iron 79 85 41 49 



430 TRANSPORTATION BY RAIL. 

chases. This was strikingly illustrated by the rivalry which 
existed at one time between our principal seaboard cities^ New 

York^ Boston^, Philadelphia and Baltimore^ in 
Rates^"^^^^ their efforts to secure export business. So great 

was the pressure brought to bear on the railroads 
by the commercial organizations of these cities in their com- 
petition for export shipments that ^ates were utterly demor- 
alized. This was through the competition of the cities^ as well 
as the railroads^ and to such an extent was the contest carried 
that in 1882 it culminated in arbitration proceedings in which 
the questions involved were submitted to a committee consisting 
of Messrs. Allen G. Thurman^ Elihu B. Washburne and Thomas 
M. Cooley^ for adjustment. The findings of the committee re- 
sulted in fixing the relative freight charges to these ports^ called 
^'^differential rates/^ upon such a basis that they have remained 
practically unchanged since. By this adjustment Philadelphia 
was given a small advantage over New York^ in the matter of 
rates from the West^ and Baltimore^, a still smaller advantage 
over Philadelphia. Owing to a threatened diversion of the grain 
trade of the Northwest to Gulf ports^, the rates on grain to all 
eastern ports have since been materially reduced to meet this 
competition. A ^^differentiar^ rate then may be defined as one 
which is made between two points^ not with respect to the dis- 
tance as traversed by the different transportation lines^ but with 
regard to competitive traffic. Thus between Chicago and New 
York the passenger fare is the same on several lines of railroad^ 
and yet the distance traversed varies more than four hundred 
miles.* 

While it is strictly true that a decrease in transportation 
charges causes^ as a rule^ an increased demand for the products 



♦Between Chicago and New York there are over twenty routes varying 
in length from 912 to 1,376 miles, which compete for traffic. Between St. 
Paul and Chicago the short line distance is 373 miles and traffic is carried 
by a line 734 miles in length. Between Omaha and San Francisco five roads 
compete, varying in length from 1,865 to 2,765 miles. 



DIFFERENTIAL RATES. 431 

shipped^ nevertheless this rule is not an invariable one. There 
are commodities which form a partial exception^ and if consider- 
able reductions in cost were made^ the volume of business would 
be but slightly augmented. For example^ rates on boots^ 

shoes^ clothing and household utensils^ if reduced 
GenerarRui^e ^ would uot materially increase consumption^ since 

people are inclined to purchase such articles as 
they are needed. The same could be said of coffee^ tea^, salt 
and those articles which are consumed in small proportion to the 
total value of the requirements of consumers. In making 
\ rates then for freight traific^ it would be useless for an associa- 
tion to reduce the tariff on those articles which have a fixed 
and uniform demand, and would not be influenced by a 
reduction. 



CHAPTEE XLVIII. 

TRANSPORTATION BY RAIL— Contmued. 

CLASSIFICATION OP FREIGHT; FREIGHT RATES; COST OP 
SERVICE; ETC. 

Almost an infirite variety of commodities is offered to the 
railroad companies for transportation. If all articles were 
embraced under a single schedule and charged according to bulk 
or weighty irrespective of value^ those articles having large bulk 
with small value would be charged exorbitantly^ while articles 
having small bulk would escape their just portion of trans- 
portation charges. Thus coal^ grain and lumber 
of^Freight^°" would be subjcctcd to a charge which would be 
prohibitive, and would place them beyond the 
ordinary uses for which they are now produced. The problem in 
the classification of freight is to so fix the tariff as to produce the 
greatest amount of revenue for the railroad and at the same 
time not fetter or hinder the transportation of products by ex- 
cessive charges. The tariff rates upon transportation lines have 
an important bearing upon the prosperity of the communities 
through which they run, by stimulating or retarding production 
of commodities. The earliest freight tariffs involved a very 
imperfect classification, and each railroad had its own system, 
but as the through business developed, this multiplicity of 
freight rates was found inconvenient and cumbersome, making it 
difficult for shippers or buyers to ascertain in advance what the 
freight charges upon a long-distance shipment would be. 

Eailroads divide their freight into four or more general 
classes, according to bulk and value. Goods having great value 
and small bulk, such as dry goods and groceries, are placed in 

432 



CLASSIFICATION OF FREIGHT. 433 

the first class. Lumber^ fuel, grain, ore and other bulky but 
low priced commodities are placed in the fourth or a lower 
Object in class. Goods of the first class are charged two or 

Classification three timcs as much for transportation as those 
o reight embraced in the fourth class. It is true that 

the greater risk assumed in carrying goods of high value, to- 
gether with the extra care and labor in handling or storing them, 
will in a measure justify a higher freight charge, but this is 
very slight in comparison with the difference between the rates 
upon the two classes. The carrying charges upon different 
classes of freight are not based upon the cost of the service, but 
upon what traffic will bear. If a ton of lumber were sub- 
jected to the same freight charge as a ton of dry goods, no 
lumber would be shipped. The freight rate would be practically 
prohibitive. Thus by means of a wise classification of freight 
the cheap traffic is made possible, and the high-class traffic is 
not seriously hampered, the railroad revenues are increased by a 
large volume of business and the public wants are satisfied. Some- 
times a commodity is placed in two or more classes depending 
upon the quantity shipped. Thus car load lots receive a lower 
rate than is allowed to the same commodities in less quantities. 
In former years railroad companies sometimes placed certain 
commodities in a lower class temporarily in order to stimulate 
new industries or develop traffic in certain direc- 

UnjustDis- ,• -r 1 . . • 1 J 

criminations tious. Large shippers were given special ad- 
vantages over small ones in the form of rebates 
against their freight bills, and competing points were accorded 
lower rates than non-competing points. An extensive system 
of favoritism and discrimination thus grew up which abounded 
in injustice to the public, and interfered with the natural oper- 
ations of trade. To remedy the evil. Congress, in 1887, en- 
acted the Interstate Commerce Law, designed to prevent un- 
reasonable rates and unjust discrimination between persons, 
places and classes of traffic. 



434 TRANSPORTATION BY RAIL. 

At first impression it would seem that the charge for carrying 
freight should depend wholly upon what it costs the company 
to perform the service^ and include a fair profit for the capital 
Factors in employed in the business. But freight rates are 

Determining not usually fixed in this way. Three factors must 
reig t ates ^^ taken into account in determining rates. The 
first is^ what will it cost the company to furnish such service? 
Second^ what will the shipper be willing to pay^ or what can 
he afford to pay? Thirds what competition among other trans- 
portation lines^ by eithe:; land or water^ must be met or over- 
come in order to secure tie business. These three factors in the 
problem must be considered in arriving at the freight rate. 

It is not practicable to fix rates on a basis of cost of service, 
because it is not possible to determine in any particular case 
what the actual cost of the service has been. Thousands of 
items must be taken into consideration in arriving 
Cost of Service at the total expenses of running the road^ and no 
official can say just what proportion of these ex- 
penses should be chargeable against any particular shipment. 
Again^ as previously stated^ it is only by charging certain com- 
modities of high value a large profit over the cost of service^ that 
commodities of low value can be carried at a very low rate.* 

Fixing rates according to the value of the service to the 

shipper^ or what he can afford to pay^ is called "charging what 

the traffic will bear.^^ This method aims to make the charges 

such as to produce the most revenue to the railroads without at 

the same time reducing the volume of traffic. If 

>Vhat the Traffic ,^ • • r? j. i x xi i • j 

Will Bear ^^^ scrvicc IS of great value to the shipper^ and 

enables him to reap a large profit on the goods 

shipped;, he can well afford to pay a liberal freight charge, and 

this will enable the railroad company to carry other and less 

♦Commodities of low value are carried at low rates also on account of the 
large volume of that traffic and the slow speed of the trains. Thus coal 
trains run at low speed, while trains loaded with perishable goods must be 
run at a much higher speed, and at an increased cost. 



FREIGHT RATES. 435 

profitable merchandise at a low rate. Expensive articles of 
small bulk will bear a high charge without adding much to the 
percentage of increase in cost caused by the carrying charges^ 
while farm products and other bulky freight must have a low 
rate, or they will not be produced and shipped. 

Competition must always be taken into account in fixing 
rates. Charges must be fixed and modified according to the 
varying conditions under which railway traffic is conducted. 
There is not only the competition of rival lines of railways, but 
also that of waterways. In a very large portion of 
Competition the United States shippers have a choice of trans- 
portation by rail or by water upon the great lakes, 
rivers and canals. There is also the competition of cities and 
markets to be taken into account. Thus the Atlantic cities are 
in sharp competition with gulf ports or outlets for the products 
of the Xorthwest. A more favorable market in one city than 
another will infiuence the stream of trafl&c in a corresponding 
direction. Competition then is an important factor in determin- 
ing freight rates. 

Attempts have been made in various states to prescribe that 
freight charges shall be in proportion to distance. Such rates 
are termed ^^equal mileage rates." But these are obviously un- 
fair since it costs a railroad company more than half as much 
to carry a shipment fifty miles as to carry it one hundred miles. 
Goods must be stored, handled and billed, the same for a short 
distance as for a long one. Once loaded upon the 
Rates * ^^^^ ^'^^^^ ^^^^y ^^quire very little care until they reach 
their destination. An equal mileage rate there- 
fore is an injustice to either the railroad company or to the 
public. 

Owing to competition and other causes it was thought neces- 
sary in some cases, in order to secure business, to take freight 
for a through shipment at a lower rate than was charged for a 
local shipment — to charge less for the entire distance than for 



436 



TRANSPORTATION BY RAIL. 



a part. This is called the "long and short hanl/^ and would 
seem to be discrimination of the most unfair and objectionable 

kind. It was quite common in railroad manage- 
ShortHaui nicut prior to the passage of the Interstate 

Commerce Act^ by which it was made illegal 
in all cases when both charges were made under "sub- 
stantially similar circumstances and conditions.^^ Such dis- 
criminations have now become infrequent;, and yet there are 
instances when the long and short haul discrimination is justi- 
fiable. To illustrate^ the steamship lines doing business be- 
tween IsTew York^ other North Atlantic ports and New Orleans 
offer such competition to the railroads that they must either 
make a discrimination in favor of the long and short haul or fail 
to secure the business. Intermediate points are not affected 
by the water competition. The railroads can afford to take 
their through business at a slight advance over actual cost 
of service rather than not have it. They could not reduce their 
local rates to the same basis without destroying their profits. 
Again^ were railroads in the United States parallel those in 
Canada^ a discrimination is justifiable, for if our railroads were 
compelled to maintain their through rates on the same basis as 
their local traffic, it would have the effect of sending through 
shipments of grain via Canada where the railroads are not under 
such restrictions, and would merely put profits in the pockets of 
foreign railroad owners. The Interstate Commerce Commission 
has held that competition against foreign railroads is sufficient 
grounds for lower rates from terminal points. 

For the purpose of facilitating the shipment of freight, and 
especially where the property is to be shipped a long distance, 
over several lines of railroad, fast freight lines have been 
formed. Nearly all of the business from the West to the 
Atlantic seaboard and territory east of Buffalo and Pittsburgh 
is handled over fast freight lines. A few of these fast freight 
lines own their own cars, do their own billing and conduct 
their business distinct from that of the railroad companies, pay- 



PAST FREIGHT LINES. 437 

ing the different roads a mileage, for hauling their cars. Most 
of the fast freight lines, however, are combinations of the rail- 
road lines merely for the purpose of facilitating 
Fast Freight j]^g interchange of freight, and to expedite the 
shipment. The railroad companies do their own 
billing and send a tissue cop)^ to the fast freight office. 

The cash receipts are apportioned among the different roads 
in proportion to the mileage of each or on other agreed bases, 
and in case of a claim of damages, the matter is taken up and 
adjusted between the roads. The fast freight line in this in- 
stance becomes a sort of clearing house for carrying out a 
mutual arrangement between two or more lines of railroad. 

The methods of handling freight for through shipment have 
been so perfected that the railroads now receive goods con- 
signed to all stations on any road, and even to many foreign 
cities. Upon delivery of the goods to the railroad agent the 
shipper or ^^consignor'^ is furnished with a receipt in the form 
of ^^Bill of Lading.^^ Freight is shipped in two 
Shtpnient ^^^J^? ^'^straight consignment" or ^^order." When 

a straight consignment bill is issued, the goods 
must be delivered to the consignee or to the person to whom he 
may order them delivered as his agent. Most shipments are of 
this class. An order bill is one that may be transferred by en- 
dorsement. Such bills are usually for the purpose of securing 
the payment at destination of a draft drawn for the value of 
the property. The draft is usually pinned to the bill of lad- 
ing, and both are sent through a bank for collection. Wlien the 
draft is paid the bill of lading passes to the payer. The bill 
of lading is also endorsed to him and he may then claim the 
property. A way-bill containing the number and initials of 
the car, names of consignor, name and address of consignee, 
place of shipment, place of destination, description, weight or 
number of articles, class and rate of freight, and total freight, 
is made out for each shipment, and accompanies the goods 
through to destination. 



FOREIGN COMMERCE. 



CHAPTEE XLIX. 
TRADE RELATIONS WITH FOREIGN COUNTRIES. 

DUTIES; RECIPROCITY; BOUNTIES; SUBSIDIES; NAVAL 
PROTECTION. 

We scarcely realize to what extent we are dependent upon 
the products of distant countries and climes for the comforts 
which we are constantly enjoying. The clothing which we 
wear may be from wool grown in Australia or from silk grown 
in France or Italy; the leather in our shoes may 
lustrations havc comc from the plains of Uraguay or Argen- 
tina; the furs that keep us warm are from the far 
north; the rubber that protects us from rain was the sap of a 
tree in Brazil; the coffee we drink was grown in Mexico or 
South America and the sugar and spices which we consume 
were grown under a tropical sun. Not only are we dependent 
upon the world, but in turn we contribute to the world's demand. 
A large portion of the beef supply of England is grown upon our 
great western prairies; the wheat from Dakota becomes bread in 
Europe; the cotton from the south clothes the peasantry of the 
Old World; the oil from the wells of Pennsylvania is trans- 
ported to distant lands and affords cheap and safe light to 
those who have lived heretofore in semi-darkness, while Ameri- 
can agricultural implements, sewing machines, tram cars, clocks, 
watches, typewriters, electrical apparatus and rubber goods 
are furnished for world-wide consumption. Merchant ships 
carrying the products of all nations are upon every sea. They 
cross and re-cross, braving every danger in order that they may 
distribute the products of factory, field, mine and forest. 

438 



FOREIGN COMMERCE. 439 

The growth of business relations between the United States 
and foreign conntries has not been uniform during our history, 

History of ^^^ ^^^ ^^ ^^^P^ P^^^ ^^'^^^ ^^^^ progress in domestic 

American affairs. We have been chiefly absorbed in the 

ommerce development of home industries. Now and then, 

under favorable conditions, such as navigation or tonnage laws 
our foreign trade has advanced. The past thirty years has 
witnessed a wonderful development in foreign commerce, and 
our exports during this period have almost uniformly exceeded 
the imports. This development has been owing to the increase 
in the surplus of our food products, especially breadstuff s; to 
the development of inventions and methods of transportation; 
to the increase in the volume of our manufactures; and to the 
policy of reciprocity which has been in force during a portion 
of this time. Improved methods of transportation have enabled 
the products of the west to reach the seaboard cities and from 
thence European markets at such rates as to enter into com- 
petition with similar products of other countries. Without 
modern appliances the large export trade in fresh meats, butter 
and fruits could not exist. 

The foreign commerce of a nation is vitally affected by its 

tariff policy. If it imposes duties upon imports it thus in a 

measure discourages the importation of foreign merchandise in 

order to stimulate home production. Or it may 

Import and • t j • j • t j 

Export Duties mipose dutics upou cxports m order to encourage 
their home consumption.* Both import and export 
duties tend to diminish the volume of foreign commerce. On 
the contrary, the policy of free trade tends to encourage and 
increase foreign commerce. England has been practically a free 
trade country since 1850t and her foreign commerce far sur- 

*Our constitution expressly prohibits the laying of duties upon exports. 

fThe only duties now under English law are a small export duty on 
coal imposed in 1901, and import duties on playing-cards, cocoa, coffee, 
chicory, dried fruits, tea, tobacco, wine and beer, spirits, liquor, cordials, 
and other articles manufactured of or containing spirits. 



440 FOREIGN COMMERCE. 

passes that of any other nation. It should be remembered, 
however, that England is an export country. The limited area 
of the British islands compared to their manufacturing capacity, 
offers but a small home market for an enormous output of manu- 
factured products. Hence what England needs is cheap raw 
materials brought in duty free, to be converted into finished 
products for world-wide sale. The United States has pursued 
the policy of a tariff upon imports, and has shaped this tariff not 
with a view of fostering foreign trade, but as a protection to 
home industries. The duties have been especially high upon 
lall classes of products which are produced within the United 
States in order to prevent the competition of foreign countries. 
The enlightened policy of reciprocity has been one means 
of promoting foreign trade. Under this policy two nations 
mutually agree to admit the products of each other into their 
ports, either duty free, or at a reduction from the regular tariff. 
Congress passed an Act in 1890 under which reciprocity agree- 
ments were entered into with Cuba, Porto Eico 
Reciprocity and Several Central and South American countries, 

the effect of which was to greatly stimulate trade 
with those countries, but the law was abolished, and the agree- 
ments terminated on Aug. 27, 1894, after which our trade with 
those countries declined. We now have reciprocity treaties in 
'force with several European nations* and under their potent 
influence our foreign trade with those nations is growing apace. 
A bounty is a fee or percentage paid by the Government to 
a manufacturer for products exported, as an encouragement to 
Bounty ^^ industry. By means of this Government aid 

Countervailing the manufacturer is enabled to sell his products in 
" ^ a foreign market at a lower price, and thus com- 

pete with foreign manufacturers. The opposite of a bounty 
is a countervailing duty, levied upon imports in order to neutral- 

♦Under the Act of 1897, the United States made reciprocity agreements 
with Germany, France, Italy and Portugal, which are still in force. 



DUTIES. 441 

ize the effects of a bounty offered by the government from which 
the goods were shipped. For example, Germany and several 
other exporting nations of Europe pay a bounty to their manu- 
facturers on all sugar exported. Such sugar when imported into 
the United States has an advantage in our markets on account of 
the bounty, over Cuban sugar or that from our own refineries. 
To offset this advantage and protect other sugars in our markets, 
our Government may levy a countervailing duty in addition to 
the regular tariff. 

Navigation and tonnage laws have at different periods been 
resorted to by this and other countries as a means of foster- 
ing shipping and encouraging foreign commerce. Soon after 
our Constitution was adopted, the United States passed a series 
of tariff and tonnage Acts by which the duties were lower on 

goods imported in American vessels entering our 
Ton'^SAc^^^^ P^^ts. About 1850 both England and the United 

States abandoned the policy of navigation laws 
and since that date no effort has been made through legislation 
to build up a merchant marine.* As a result our shipping in- 
terests have steadily declined since 1857. At that time we 
carried 75 per cent, of our foreign commerce in American ships. 
In 1902 this percentage had fallen to a little less than 8 per 
cent. 

The term subsidy, as applied to shipping denotes the gift of a 
sum of money, either annually or otherwise, by the Government 
as an aid and encouragement to the extension and up-building 
of marine interests. From 1846 to 1856, — a period of ten 

*A law was passed in 1792, and is still in force, requiring all ships 
which carry the United States flag and are registered as belonging to the 
United States, to be made in this country. Instead of stimulating ship- 
building in this country, this law has had the effect in recent times of 
causing large amounts of American capital to be invested in foreign-built 
s ips, carrying foreign flags, since a steel ship could be built on the Clyde 
from fifteen to twenty per cent, cheaper than in this country. The abolition 
of thiis law is advocated by those who favor "free ships," so that American 
capital can sail under our flag, without regard to where the ships are built. 



442 FOREIGN COMMERCE. ^ 

years, our Government pursued the policy of subsidizing steam- 
ship lines by paying large bounties for carrying the United 
States mails. As a consequence the tonnage of our steamships 
registered for deep-sea carryings which in 1847 was 5^631 tons, 
increased to 115,045 tons in 1855, and our Mer- 
Tramps^^ chaut Marine reached its greatest height of 

strength and glory. The Collins Line of mail 
steamers was established between New York and Liverpool, 
under a favorable contract for carrying the mails and success- 
fully competed with the heavily subsidized Cunard Line of 
England. Contracts were also entered into by our Government, 
with lines of steamers to the West Indies, Panama and Pacific 
Coast ports. But in 1856 the law was modified and the sub- 
sidies seriously reduced. In 1858 the subsidies were virtually 
abolished and the actual postage rate on letters carried was sub- 
stituted. This continued to be the policy of our Government 
until the enactment of the Postal Aid Law of 1891, which in a 
measure increased the compensation for carrying the mail. 

England has encouraged shipping by liberal subsidies, and 
through this means has built up lines of steamers to all parts 
of the world. She has awarded liberal contracts to her ship- 
yards for the construction of war ships and trans- 
Subsidies ports in Order to encourage the extension of priv- 

ate shipyards. Direct subsidies to shipbuilders 
and shipowners who would build after plans furnished by the 
Admiralty, and enormous indirect subsidies for carrying the 
mails, supplies or troops have been bestowed, by the English 
Government. France pays a bounty per ton on all ships built 
in French shipyards of steel and a subsidy per ton for every 
thousand miles sailed by French vessels. 

A "tramp'' steamer is one which has no regular sailing route, 
is not subsidized and goes to any port where it can secure a 
cargo. English and German tramp steamers are in all parts of 
the world. Sometimes a period of one or two years elapses 



SUBSIDIES. 443 

before a tramp returns to its home port. Such ships have the 
advantage over those of a regular line, in that they are not 
obliged to sail on fixed dates and perhaps with insufficient cargo, 
but may cruise from port to port until a cargo is secured. Sail- 
ing ships aim to make direct voyages in which they can carry 
cargo both ways. 

One of the first conditions of foreign commerce is the pro- 
tection of property and persons in what ever part of the earth 
they may be. This can only be secured by a navy which shall 
command respect in every sea and port. "Trade 
«ie F^ia^°"°^^ follows the flag'^ is a commercial aphorism now 
well recognized by the great nations. No nation 
can hope to build up a large or prosperous foreign commerce 
which has not a well-equipped navy* sufficiently large to enable 
it to scatter ships to all quarters of the civilized world, within 
protecting distance of the interests of its citizens. Ship cap- 
tains in the absence of Consuls should be allowed a degree of 
discretion in the settlement of questions requiring prompt action, 
where the rights of American citizens are in jeopardy. English 
ship captains have such discretion and may exact reparation for 
wrongs inflicted upon a British subject in a foreign port with- 
out waiting to communicate with their home Government. 

As an important adjunct to our coastwise and foreign com- 
merce the Government maintains over two thousand light houses 
at all danger points along our coasts, besides several thousand 
buoys, fog-horns and bells as guides to ships entering or leaving 
our harbors. Harbor masters are appointed whose duties in- 
clude the regulation of shipping within the har- 
Bxfoys, Etc.^^' t)ors, licensing of pilots, inspection of ships, etc. 
Although ships may sail upon any sea it is cus- 
tomary to require all vessels to be registered in some country. 
Ships are then said to belong to the country in which they are 

♦The United States stands fourth among the great nations in the tonnage 
of its navy, England being first, France second, and Russia third. 



444 FOREIGN COMMERCE. 

registered^ and bear its flag. The ship carries papers stating the 
facts concerning its registry^ ownership^ inspection to secure 
safety^ the name of the port from which it last sailed, its destina- 
tion and the nature of its cargo. The custom of carrying papers 
originated in the attempts to suppress piracy, but is continued 
to the present time, chiefly for the information which it fur- 
nishes of a commercial nature. 



CHAPTEE L. 

FOREIGN COMMERCE— Continued. 

INTERNATIONAL LAW; TREATIES; CONSULAR SERVICE; FOREIGN 

EXCHANGE. 

The law of nations is a system of usages^ customs and opin- 
ions founded upon the general principles of right and justice 
as understood in this enlightened age^ and which has become 

established by the great nations of the world. 
Law"^*^°"^ This system regulates the conduct of nations 

towards each other commercially as well as polit- 
ically;, and is binding upon all by common consent. The great 
nations of Europe together with the United States, being, as we 
have reason to believe, the most enlightened and just of the 
world, as well as the most powerful, have established a code 
of international law peculiar to themselves. Under this law 
treaties are made and enforced, commerce between countries is 
regulated and the rights of citizens abroad are protected. 

Treaties are of three kinds, viz., treaties of commerce, 
treaties of peace, and territorial treaties. Treaties of commerce 
define and establish the rights and extent of commercial inter- 
course. Every nation may enter into commercial treaties and 
grant such special privileg-es to other nations as it sees proper. 

It may grant special privileges to one nation over 
Treaties another, or enter into special agreements as in the 

case of reciprocity treaties. It may even refuse to 
conduct any intercourse whatever with foreign nations, as was 
the case when President Jefferson laid the general embargo on 

445 



446 FOREIGN COMMERCE. 

trade in 1807^ or it may reserve to itself such portions of its trade 
as it deems proper. An instance of this may be seen in the 
reservation of the coasting trade of the United States to onr 
own ships. Treaties of peace are made as a result of war. They 
may provide for the payment of money^ as indemnity^ the cession 
of territory or the granting of special privileges/ such as coaling 
stations^, etc. Territorial treaties are in effect contracts made 
between nations for the purchase or sale of domain. Such was 
our treaty with France for the purchase of Louisiana^ with Spain 
for the purchase of Florida, with Mexico for the Gadsden pur- 
chase, and with Eussia for the purchase of Alaska. 

In order to regulate foreign commerce, carry out the pro- 
visions of treaties and protect the rights of citizens abroad each 
nation exercises jurisdiction over its seamen, vessels and mer- 
chandise in foreign lands. This is done through the consular 
service. In every port of any consequence throughout the 
Avorld the United States is represented by one or more consular 
officers. These are divided according to their 
Service^^ rank and importance, into Consuls-General, Con- 

suls, Vice-Consuls, Consular Agents and Commer- 
cial Agents. They are appointed by the President, and their 
compensation is fixed in one of three ways, viz.: (1) A fixed 
salary. (2) A salary with permission to engage in business, and 
(3) Fees, with permission to engage in business. Those who 
receive a fixed salary and devote their entire time to the duties 
of the office, embrace all of those officials who occupy posts in 
the foreign cities with which the United States has extensive 
trade relations. In this class of consulates the receipts from 
fees are paid over to the government. Those consuls who are 
allowed to engage in business occupy stations where the business 
of the consulate does not engage their entire time, and those 
who receive fees and are allowed to engage in business occupy 
posts in which the duties of the office require but a small part of 
the agent's time. 



I 



CONSULAR OFFICERS. 447 

The duties of consular officers in foreign ports are numerous 
and embrace the carrying out of treaty regulations; adjustment 
in cases of disagreement between master and seamen; salvage 
in cases or shipwreck; receiving reports of ship-captains on enter- 
ing and leaving the port; sending to the home 
Cons!aar Officer government reports on the condition of trade; 
granting of passports and protection of citizens; 
care of property of deceased citizens; extradition of fugitive crim- 
inals; certification of invoices of goods to be shipped to the 
United States^, etc. 

This latter is one of the most common duties of a consul. 
The invoices of all goods imported into this country must pass 
through the hands of the American Consul at the port from 
which they come.* If the goods are to be shipped from an in- 
terior town or city they are forwarded with full particulars as 
to their value, size, number, etc.; to a shipping or forwarding 
agent in the seaport town who for a small commis- 
invoi^er ®^^^^ attcuds to the details of shipment. The 

shipper makes out an invoice, — three copies. 
These he takes to the office of the consul, and makes oath that 
the prices, quantities, etc., are absolutely correct. The oath is 
a precaution against fraud, for otherwise an American importer 
and foreign merchant might enter into a collusive arrangement 
for falsifying an invoice and making the price lower than it 
really was, thus defrauding the Government out of a portion 
of its revenue. The consul files one copy of the invoice at his 
office; one copy he sends to the custom house where the goods 
are to be entered for export and the third is given to the shipper, 
together with the consul's certificate. The shipper then turns 
the goods over to the agent of the steamship line, and receives a 
bill-of -lading also made out in duplicate or triplicate. The ship- 



♦Likewise the invoices of aU goods exported from the United States must 
pass through the hands of the foreign consul at the port in the United States 
from which they are shipped. 



448 FOREIGN COMMERCE. 

per keeps one copy of the bill-of -ladings one copy is pinned to 
the invoice and consular certificate and forwarded to the con- 
signee at the port of destination; and in some instances one copy 
goes to the ship^s captain^ as the ^^Captain's Copy/^* 

An important factor in foreign commerce^ and one which ex- 
porters frequently overlook^ is the proper packing of goods for 
export. This should be governed almost wholly by the condi- 
tions to be met with in the country to which the goods are sent. 
For mountainous countries without good roads^ as for example, 
South America, goods destined for interior towns 
Packing Goods are transported upon the backs of mules over 
rocky and tortuous roads, and hence must be 
packed in boxes or bales that can be readily carried in this man- 
ner, one-half the load being upon each side of the animal. 

Again the arrival of goods in the rainy season or in the dry 
season would make a difference as to the method of packing, 
but as a general rule all merchandise which would be injured by 
water should be packed in boxes lined with zinc and oilcloth, or 
waterproof paper, or if packed in bales should be covered with 
oilcloth or tarpaulin beneath the outer coverings of the bale. As 
far as practicable only one kind of goods should be packed in a 
box or bale, otherwise there may be trouble in passing the goods 
through the foreign custom house. 

Houses engaged in foreign commerce use a distinctive mark 
— a trade-mark, — of such a character or design as to be recog- 
nized by the purchasing public in whatever country the goods 
are offered for sale, as the mark of the American 
Trade Marks manufacturer or exporter. We are told that the 
^^Mt. Vernon" brand of flour made by George 
Washington was accepted abroad as of especial excellence, and 
the same would be true to-day in regard to the value of a special 

♦When a bill-of-lading is made out to order it is transferable by en- 
dorsement the same as inland bills. The bill has printed across its face 
"Original," "Duplicate" or "Triplicate," one of which being honored by 
delivery of the goods, the other two become void. 



TRADE MARKS. 449 

name or mark. Foreigners are often unable to discriminate or 
judge of the merits of foreign manufactures^ and knowing that 
a certain brand has been tried and found satisfactory^ they con- 
tinue to purchase it. The United States has entered into agree- 
ments with nearly all of the leading commercial nations with 
regard to the protection of trade-markS;, but in order to secure 
this protection the trade-mark must be registered. Mere use^, 
how^ever long continued^ does not^ as in this country^ determine 
the right tc the exclusive use of the mark. 

An important element in foreign trade operations is the 
banking feature. As previously explaired^ one of the important 
functions of banks is to supply the necessary capital to bridge 
over the interval of time between producer and 
Featu^^e^ cousumcr. This in the case of foreign trade is 

necessarily considerable^ since the producer or 
manufacturer is situated perhaps thousands of miles from the 
consumer^ and weeks or even months are required before the 
products reach their destination and are paid for. When goods 
are shipped to a foreign customer in many cases no drafts are 
drawn^ the amount being simply charged in account to await 
remittance by bank draft through due course of mail. In other 
cases documentary drafts are drawn for the shipment C. I. P.* 
and f orw^arded through the bank. Such drafts are usually pay- 
able at sight or a given number of days after sight and the 
shipping documentst attached are to be surrendered on payment. 
If the draft has considerable time to run it is generally dis- 
counted with a home banker. 

Drafts draw^n against foreign shipments are usually made pay- 
able in the currency of the country in which they are to be paid. 
Thus a shipment to Germany is payable in marks^ to Mexico in 
pesos, etc. The seller takes the risk of fluctuations in exchange^ 



*C. I. F. means cost, insurance and freight. 

fThe shipping documents here referred to consist of invoice, bill-of-lading 
and insurance certificate. 



450 FOREIGN COMMEROE. 

and this is one of the disadvantages in selling to customers the 
rate of exchange in whose country is not uniform. 

The bank forwards the draft with documents attached to a 
bank at the place where it is payable. The bank there presents 
the draft tor payment or acceptance. If a time drafts the goods 
are usually landed and warehoused by the bank^ 
Exchange Until the draft is paid. In case the consignee 

desires to withdraw a portion of the goods from 
the warehouse he may arrange with the bank to do so by paying 
a portion of the drafts the amount being endorsed thereon. At 
maturity the draft is paid plus interest from its date until the 
approximate time it will require a remittance to reach the point 
of shipment in the United States^ and also plus the storage 
charges. The bill-of-lading and insurance certificate are de- 
livered to the drawer when the draft is paid. 

Within twenty-four hours after a ship touches a dock in 
any port of the United States the captain or a duly authorized 
officer must hand in to the Custom House the ^^Ship's Report." 
No goods can be landed nor even bulk broken until this formal- 
ity is complied with.* This report is a document in 
ofstTipr prescribed form giving the name and tonnage of 

the vessel^ name of the captain^ number of the 
crew^ port from whence arrived^ and a full and complete detailed 
list of the entire cargo^ the number of boxes, bales, barrels or 
casks and their contents so far as is known, the names of the 
shippers and the consignees. This report is made out in dupli- 
cate. One copy is retained in the Custom House and the other 
is sent to an officer at the dock where the ship is to unload, 
who checks off the goods as they are discharged from the vessel. 
The goods are now delivered to holders of bills of lading, upon 
payment of the freight and duties or other charges, or if not 
called for at once, are sent to bonded warehouses. 



♦This report is usually given to the custom house officer who comes 
aboard, in many cases with the health officer. 



■ 



CLEARANCE OF SHIPS. 451 

When a vessel is completely loaded the master must^ before 
being allowed to sail^ receive his clearance papers from the 
port authorities. The permit to sail is based upon 
of^ships^ the captain^s report of cargo and passengers^ pay- 

ment of dockage^ pilotage^ seamen^s wages, etc. 
When these are satisfactory, permission is given to sail. 



FOREIGN EXCHANGE. 



CHAPTEE LI. 

INTERNATIONAL SETTLEMENTS. 

INTERCHANGEABLE VALUES; MINT PARITY; ARBITRAGE; GOLD 

SHIPMENTS. 

International trade, or the exchange of commodities between 
nations, requires a medium by means of which resulting balances 
can be satisfactoril}^ settled. The ultimate medium adopted for 
this purpose is pure gold^ and this metal is the basis of all cal- 
culations in connection with foreign exchano'e. Of 

Legal ^ ^ ^ 

Value of course for practical purposes the metal must have 

^°^^ an alloy, and each nation has determined the 

quantity of base material employed independent of other coun- 
tries^ but nevertheless they are all pretty nearly in unison. The 
general system employed is 9-lOths pure gold and 1-lOth alloy, 
with the exception of Great Britain, which uses 11-12 and 1-12. 
A further circumstance is the legal value placed upon the metal, 
tlius giving assurance for all time that its value will be stable; 
and it is this officially made stability which renders it possible 
to determine tlie value of the money of one country in that of 
another. The value of gold in tlie following countries as de- 
termined by law is respectively: 

Great Britain, 1 oz., ll-12ths fine = 77/10 

United States, 25 8-lOths grains, 9-lOths fine, $1.00 
Germany, 122.915 grains, 9-lOths fine, M. 20 

Latin Union, 99.561 grains, 9-lOths fine, F. 20 

Taking these gold values as a basis we arrive at the follow- 
ing interchangeable values of the various coins: 

452 



^ 



FOREIGN EXCHANGE. 453 



One pound sterling weighing 123 27-100 grains 11-12 fine 
equals $4.8665, equals Fc 25.2215, equals Marks 20.4296. This 
Interchangeable ^^ ^^^^^* ^^ termed the mint parity, or the value 
Values at which the respective mints in London, Wash- 

arity ingtou, Paris and Berlin, would accept the coins 

of each of the other nations. 

The following weights of the principal coins of the four 
above-named nations, will enable the student to follow out the 
calculation for himself: 

1 Eagle or |10 = 258 grains, 9-10 or 232 grains pure gold. 

Sovereign, £1, = 123.270 grains, 11-12 or 113 grains pure gold. 

1 Double Crown, or M. 20 = 122.915 grains, 9-10, or 110.624 grains 
, pure gold. 
I 1 Napoleon or Fc. 20 = 99.561 grains, 9-10, or 89.605, grains pure gold. 

( The foregoing is the fundamental basis of foreign exchange, 
' and with these principles firmh^ grasped, the various ramifica- 
i tions of the business are readily understood. 
I In the early period of international commerce, when each 
I European principality coined its own money and falsified 
, and clipped it according to the needs and exigencies of its 
; petty sovereign, the. only international medium of exchange 
was the promissory notes of the great merchants of the 
middle ages. These notes circulated the year around as money, 
and were payable as a rule on certain days at certain cities where 
the great annual fairs were held, and were redeem- 
Historicai able at fixed values in silver. A striking instance 

of the power wielded by these merchant princes is 
to be found in the history of the steelyard in London, a settle- 
ment of Hansa merchants in the city, making their own laws and 
governed only by their own rules and traditions, regardless of 
the laws of the land whose hospitality and protection they en- 
joyed. The pound of silver was the measure of value, but the 
pound of silver was an unknown quantity unless it was desig- 
nated in the bond as a pound of silver of the Esterlings, or 
strangers — hence the origin of the term Pound Sterling, which 



454 FOREIGN EXCHANGE. 

has subsequently been adopted as the denominational standard of 
value of Great Britain. Modern legislation has remedied all the 
defects of the earlier systems^, but a recital of former conditions 
is none the less interesting as an introduction to our present 
methods^ which are the fruits of evolution and have been placed 
upon a scientific basis of fact. 

Goods are being transported from one country to another, 
and this is the natural method of liquidating an international 
indebtedness. This failing, recourse is had to the transfer 
of credits arising out of former transactions, and as a last 
resort, refuge is had to shipping bullion or minted coin. Let us 
Liquidation of f oUow a shipment of hardware from England, val- 
internationai ucd at say $1,000, to South America, where for 

argument's sake it has been disposed of for $2,000. 
Instead of remitting the money to England and sending the ship 
back empty, the agent of the English merchants purchases hides, 
which are forwarded to France, as the best market, and are there 
sold for $4,000. The ultimate result of this transaction is that 
France owes England a debt of $4,000 which must be liquidated 
in either of the foregoing methods. Now the probabilities are 
that goods will be forwarded to England and there disposed of at 
a profit. We have assumed that this train of transactions has 
been carried on by one merchant and his agents, but this is not 
the modern way, and it is here that international banking- 
steps in as the connecting link between each transaction, but the 

ultimate liquidation has taken place by the ship- 
BankS°"^^ ment of merchandise notwithstanding. In each 

case the banker has been called upon to provide 
the funds and the buying and selling of the bills of 
exchange is what constitutes the liquidation. But, never- 
theless, the exchange of merchandise is the essence, hence 
it is clearly demonstrated that the economical method of liquidat- 
incr an international trade balance is through the sale of com- 
modities. 



INTERNATIONAL BANKING. 455 

This constant interchange of commodities creates credits and 
debits and foreign transactions are carried out primarily with a 
view to adjusting these balances. The debits are set off against 
the credits^, and only the balance is left for settlement in money. 
A merchant shipping goods to a foreign port desires reim- 
bursement therefor immediately the goods are loaded. He 
therefore draws on the purchaser, attaches to the draft 
all evidences of the shipment;, and negotiates the draft 
through his banker. He here incurs a risk that on arrival 
the purchaser may be insolvent, or for specious reasons may 
refuse to accept the goods, thus entailing loss and perhaps ruin, 
consequently this method is only adopted where the shipper is 
well acquainted with the purchaser's financial standing. Other- 
wise he requires a bank credit — i. e., an undertaking on the part 

of a bank that his drafts if drawn under certain 
Methods couditious will bc promptly paid. We will say the 

above shipment was made to Germany, but the 
banker negotiating the bill has no use for funds in that country, 
but desires the money in London. Xow any number of courses 
are open to him, which will enable him to place the money to his 
credit in London. He can send the bill of exchange to his Berlin 
bankers for discount, if it is a time bill, and instruct them to 
buy a transfer on London; or he can remit the bill direct to 
London and sell it in the open market; or he can have his Berlin 
bankers buy French exchange and remit this to London for sale, 
or purchase therewith in Paris transfers on London. There 
really is no end to the combinations that can be made, but for 
all practical purposes there are very rarely more than three, 
and those under very peculiar conditions; but the writer recalls 
one particular transaction which required the intermediary of 
four financial centers before it Avas brought to a satisfactory 

conclusion. This method of adjusting balances 
Arbitrage is Called arbitrage, or arbitration, and is quite 

common among foreign bankers; in fact by some is 
made a special feature of the business. 



456 FOREIGN EXCHANGE. 

The parity of exchanges with America as the center, is as 

follows: 

Sterling 486.65 

Germany 95.20 

France and Latin Union 518 ^ 

As the exchanges are above or below these points, they are 

said to be in our favor or against ns, and this is the only real 
indication of balance of trade conditions, as published statistics 
are fallacious and more or less misleading. As an instance, let 
us take the published Treasury statement of the U. S. for Decem- 
ber, 1902, which shows an excess of exports over imports for 
the preceding fiscal year of $670,000,000, leaving the impression 
that the IT. S. was at that time a creditor nation, while as a mat- 
ter of fact the reverse obtained, as evidenced by the current 
quotations of foreign exchange which were all far above the re- 
Factors spective mint parities. Trade balances are not the 
Determining only factors determining the rates of exchange, 
xc a^se jg^_^|.^g ^^ interest, general economic conditions and 
local causes have also a great deal to do with fluctuations. When 
money rules high it attracts a great foreign investment, which 
is made use of by so-called finance bills, but at times the opposite 
condition prevails and advantage is taken of higher rates of 
interest abroad by purchase of time bills in foreign centers for 
temporary investment purposes. 

Where one country cannot liquidate its debt to another by 
shipping what it produces, or returning securities which were 
held for investment, or selling its own securities, recourse must 
be had to gold shipments, which point is reached when exchange 
rises sufficiently above the mint parity to cover the cost of 
transportation, insurance and other minor ex- 
^°!^ penses. An additional factor is the market price 

Shipments 

for gold at point of destination. In view of the 
fact that the mint price for gold at all important centers is deter- 
mined by statute, this last statement might seem anomalous, but 
such is the case nevertheless. The quotations for foreign coins 



GOLD SHIPMENTS. 457 

varies from day to day in accordance with the desire of the 
market to encourage or repel gold shipments. The mintage 
price for bar gold is always the same^ but often a premium is 
paid if there is a scarcity. This applies to England; in France 
and Germany other methods are in vogue of a more arbitrary 
nature^ but none the less effectual. England and America are 
free traders in this respect^ and thus it always is^ when gold is 
required anywhere in the world^ that either of these countries 
is called upon to supply the needed metal. As an instance^ in 
the year 1902, gold shipments were made from New York to 
Argentina, although New York owed Argentina nothing. Amer- 
ica, however, was heavily in debt to Great Britain, and the latter 
country being called on for a remittance, simply turned the 
requisition over to the United States. The year previous a 
similar course was pursued when France demanded liquidation 
of a debt owing by England, and which England was unwilling 
to pay. The consequence was that the exchange on London fell 
to such a low point that it became profitable to ship gold from 
America to France wherewith to purchase English exchange, 
and thus was the burden of liquidating the French debt thrown 
upon the New York market, while at the rate of exchange pre- 
vailing between New York and London, a direct shipment of 
gold to the latter point would have been connected with a 
serious loss. 

It is obvious that in speaking of exchange operations between 
two countries, the money of one country must be taken as the 
standard or basis, the money of the other being considered as 
fluctuating or variable. It is natural and customary to regard the 

money of one^s own nation as the standard, as a 
Exchange rulc, with ouc exception, to which reference will 

be made later on. Thus when we read in the quo- 
tations that exchange on London is unfavorable, or against us, we 
mean that it is at a premium in New York — i. e., a good bill on 
London is worth in New York more than $4.8665 per Pound 
Sterling. A typical quotation list would read as follows: 



458 FOREIGN EXCHANGE. 

Sterling, demand 485J^ 60 days, 482^^ 90 days, 481J^ 

German Marks, demand, 95^^^ 60 days, 94^ 90 days, 94j| 
Francs, demand 5183^ 60 days, 522>^ 90 days, 623J^ 

which means that 

1 Pound Sterling is worth $4.85)^. 

4 German Marks are worth 95 /^ cents, and (this is the exception 
referred to) $1 is worth 5.183^ Francs. 

In Germany the quotations would read: 

Sterling demand .... 20.39 (Marks for £1 Sterling). 

U. S. Dollars 4.17 (Marks for $1.00). 

Francs 81.10 (Marks for F. 100). 

In France: 

Sterling demand 25.15 (Francs for £1 Sterling). 

U. S. Dollars 5.18 (Francs for $1.00). 

German Marks 123.25 (Francs for M. 100). 

In the foregoing countries it will be noted that each country 
takes its own currency as the standard, with the single exception 
of the quotation for French exchange in America. 

In England, on the contrary, the foreign countries are the 

variable quantities — e. g.: 

United States 4.87 

Germany 20.89 

France 25.15 

American exchange is sometimes quoted at so many pence per 
$. e. g., 49 13-16d. Eeverting now to the quotations in New 
York, everything being equal, and Sterling exchange quoted at 
485^, on the basis of the mint parity exchange on Germany 
Exchange should be about 94 13-16c. + 1-32%, and French 

Parity as 

Distinguished exchaugo about 520 — 1-16%, and the question 

from Mint ° ^ ^ 

Parity naturally arises, why this discrepancy? It is to be 

found in the different interest rates prevailing in the respective 

centers, which again finds its expression in the exchange rates 

for or against. Thus in London the discount rate is 2J%; in 

Berlin 3^%; in Paris 2^% — and as expressed in exchange rates, 

485i, 2039 and 2515. Thus: 

2039 -- 48525 == 23798 X 4 = 95 8-16 approximately. 
48525 -i- 2515 = 5183^ approximately. 



BASIS OP EXCHANGE. 



459 



and in this way we arrive at what is called the parity of exchange 
as distinguished from the mint parity— i. e., prevailing condi- 
tions are taken into consideration and reconciled. 



CHAPTER LII. 
FOREIGN EXCHANGE— Continued. 

INSTRUMENTS OP EXCHANGE; QUOTATIONS; THE ARITHMETIC OF 

EXCHANGE. , 

A further factor^ and one of considerable importance in its 
effects upon trade balances, at least as far as this country is 
Travelers' Concerned, is the personal expenditure of travelers 

Letters of abroad. It is roughly estimated that this amounts 

^'^'*'* to something like $150,000,000 per annum. In 

order to meet the needs of this class, a peculiar instrument 
has been called into being — the Letter of Credit, which 
is addressed to a certain number of banking firms, and 
sets forth that N. M. is the bearer, and is entitled to draw 
upon a certain bank, generally located in London, for a specified 
amount. Payments as made in different localities, are indorsed 
on the Letter of Credit itself, and when exhausted it is returned 
Circular Note, ^^'^^^ the last draft. A modification of this instru- 
or Travelers' mcut is fouud in the Circular Note, or Trav- 

Check 

elers' Check, which calls for a specific amount 
in IT. S. Dollars, and is payable in various countries at 
certain fixed rates. A further important instrument in con- 
nection with the Foreign Exchange business, is the Commercial 
Letter of Credit, used principally by importers. This is usually 
addressed to a firm by a bank or banker, authorizing them to 
value on its correspondent for a fixed amount, and engages that 
the drafts drawn thereunder will be protected if drawn in ac- 
cordance with the terms of the Letter of Credit. The terms are, 
as a rule, that the draft should be accompanied by Bills of 
Lading, Consular Invoices and Insurance Certificates, showing 

460 



INSTRUMENTS OF CREDIT. 461 

the shipment of goods purchased. The most common instru- 
ments used in foreign transactions are checks or cheques, demand 
drafts and time drafts. Checks are most commonly used for pay- 
ments on demand. Most countries have legislated 
Drafts^ ^"^ in favor of this method of transferring funds by 

means of the entire abolition^ or modification, of the 
stamp tax — hence demand drafts are very seldom used. In con- 
tinental countries the circulation of a check is limited as to 
time, particularly in France, and in order to avoid the possibility 
of a change in date the law in that country requires that all 
checks be dated in words, thus — August fourteenth, 1903 — in- 
stead of Aug. 14, 1903; and in Germany a check must expressly 
state that the funds transferred are derived from a balance due 
the maker. A peculiar method in vogue of evading the stamp 
tax in Germany when it is not possible to make the required 
declaration as to funds due, is to issue what is called a delega- 
tion — i. e., a communication addressed to the beneficiary that a 
specified sum will be held at his (the beneficiary's) disposal upon 
his application to certain designated parties. This instrument 
is not intended for circulation, as its very nature deprives it of 
that characteristic. Demand drafts have been almost entirely 
displaced by checks and delegations, hence are very rarely used. 
They are subject to a tax of ^ per mille, (^Voo) ^^ ^ost all 
European countries, the same as time drafts. 

Time drafts on merchants, with shipping documents attached, 
enable the purchaser to dispose of the goods by sale before paying 
for same, and generally contain a provision where 
Time Drafts the documcuts are held as security for the pay- 
ment of the draft that in the event of the drawee 
desiring to withdraw the merchandise, he can do so upon 
payment of the draft, less a rebate of interest at the 
official bank rate for the unexpired time. This on the Con- 
tinent. In England such a draft may be paid prior to maturity 
under a rebate of interest of i% above the advertised rate for 



462 FOREIGN EXCHANGE. 

short deposits in the London Joint Stock Banks, which as a rule 
is 1J% below the Bank of England rate. Thus should the Bank 
of England rate be 3%, the rebate rate would be 2%. 

The regular quotations of foreign exchange cover three dis- 
tinct classes: 

1. Posted rates. These are rates arbitrarily determined by 
international bankers in New York for the purpose of adjusting 
foreign currencies payable in the United States, and are gen- 
erally somewhat higher than the actual rates. 

2. Actual rates, are the rates at which bankers will sell 
their own drafts, telegraphic transfers, etc. 

3. Commercial rates, are the buying rates of bills of ex- 
change, etc., issued by merchants in the regular course of busi- 
ness. A typical quotation list would read as follows: 

Sterling. Tel. Transfers. Sight. 60 days. 

Posted rates 4873^ 484 

Actual 485% 485Ji 482% 

Commercial 485.40 485 483 

Germany. 

Actual 95 11-32 95J^ 94% 

Commercial 3 days 953^ 94)J 

France. 

Actual 517^^ — 1-32 5183^ 520%+l-16 

Commercial 3 days 519% 521 J^ 

It must be noted that the quotations for French exchange 
progress by f of 1%, and as the quotations are for so many Francs 
and Centimes per dollar, each progression would be the equiva- 
lent of ^ of 1% in our money, and when it is desired to shade the 
rate either up or down, this is done by quoting the rate plus 
1-16%, plus 1-32%, or minus 1-16 or 1-32. It must be further 
noted that as the foreign denomination in this case is the variable 
quantity, the higher the quotation the lower the rate of ex- 
change. 

Taking the sight draft as a basis, the following calculations 
will demonstrate how the quotations for telegraphic transfers 
and 60 d/s bills are arrived at; e. g. quotation for sight drafts on 
England, 485^, Sight drafts or checks have an average circula- 



1! 



i 



RATES OF EXCHANGE. 463 

tion of ten days^ hence the interest accruing on the amount 
drawn until presentation for payment is enjoyed by the seller. 
With telegraphic transfers^ however, which are immediately pay- 
able, this benefit falls away, so interest for ten days must be 
added to the quotation of sight exchange in order to arrive at 
the price of a telegraphic transfer. Thus: 

Sight draft or check 485.25 

+ Int. 10 ds. 3% approx .37)^ 

485.623^ 
Bankers' bills, or where documents are to be surren- 
dered on acceptance. 

Demand 485.25 

Less stamp 24 

Interest 63 ds. 2%^ 2.41 2.65 

482.60 
60 days bills with documents attached which 
are to be surrendered on payment of the bill. 

Quotation for demand 485 . 25 

Less stamp .24 

2% int. 63 days 1.68 1.9 2 

483.33 
Telegraphic Transfers. 

Marks. Demand 95. 25 

Interest 10 days 3J^^ *08 

95.33 
Bankers' bills, clean commercial bills, or such with 
documents to be surrendered on acceptance. 

Demand 95.25 

Stamp 3^^ 48 

Int. 60 days S^fo 5.12 .56 

' 94.69 

Commercial bills with documents to be surrendered on pay- 
ment under rebate of interest at bank rate in the event of the 
bill being paid prior to maturity. 

Demand 95.25 

Stamp ^fo 48 

Int. 60 days 4% (Bank rate). . 6.32 .68 

94.57 
Francs. 

T/T* 

Demand 5 . 18 . 25 

Less 10 days int. 3^ .43 

(517K - 1-32 = 517.66), 5.17,8)^ 

♦Telegraphic Transfers, 



464 FOREIGN EXCHANGE. 

Bankers' Bills. 

Demand 5.18.12.5 

Plus stamp 26 

2^% int. 60 days 1.84 2.10 

(520% + 1-16 = 520.30). 5.20.22 

Commercial Bills. 

Demand 6.18.12.5 

Plus stamps 26 

8^ int. (bank rate) 60 days. . . 2.60 2.86 

(Quoted rate 521 J^). 5.20.98.5 

In determining the value of time bills, other items of cost 
must be taken into consideration, such as commissions to be 
paid to bankers abroad for handling the items, etc. 

In discounting bills in England it must be noted that the 3 
days of grace allowed by law are taken into consideration in 
calculating the discount while on the continent, where grace is 
also customary, only 60 days are brought into computation. 

Days of grace, as applied on the continent, have 
Days of Grace relation ouly to the notarial act of protest in the 

event of non-payment — i. e. if a bill matures on 
Jan. 1 and is not paid, it will not be protested until three work- 
ing days thereafter. On the other hand it is customary in Ger- 
many, when discounting a batch of bills, to apply the bank rate 
on 5 days and the current rate on the remaining days the bills 
have to run. 

In the foregoing only the three principal, commercial coun- 
tries have been considered on account of the limited space, but 
the principles as applied are the same in other countries, barring, 
of course, local usances. The following calculations based on 

actual transactions will demonstrate many of the 
Illustration principles laid down in the foregoing pages: A 

batch of 90 d/s bills on London, amounting to 
£65,000, was bought in the New York market for remittance 
to London where the money was immediately needed. The nat- 
ural course would be to secure the discount by cable for bills to 
arrive — i. e., to go forward by first steamer. The rate received 
was 3^%, showin^: the followino- result: 



ARITHMETIC OF EXCHANGE. 465 

Amount of bills £65,000 

Less 33^^ discount 93 days £587. 15 

Stamps 32.10 620. 5 

£64,379.15 

Simultaneously an offer was received from a Berlin bank to 

buy 90 d/s bills on London at 2032, or 20 Marks 32 pfennig:e 

per £, which price included stamps, brokerage and discount. 

However, the money was needed in London and not in Berlin, so 

enquiry elicited the fact that telegraphic transfers on London 

could be bought at 2048f thus: 

£65,000 @ 2032 = M. 1,320,080 

@ 2048% = £64,433.10 

The disposal of the exchange in Berlin being the more profit- 
able by £53.15, it was sent there. Another case, where the opera- 
tion is reversed — 

M. 1,000,000 90 days on Berlin sold in London 

@ 2057 £48,615.19 

Exchange there against sold in New York 

@ 48534 $235,908.88 

If remitted to Berlin for discount and exchange sold there- 
against in New York, the result would have been as follows: 

90 days bills Berlin M. 1,000,000 

Less 81^^ disc. 90 days, M. 8125.00 

Stamps 500. 8,625 

M. 991,375 

@ 951^ + 1-64 $235,798.19 

By remitting Berlin exchange to London a saving of $110.69 
=2 Voo (per mille) was effected. 

London is the only European open market for gold, hence 

the fluctuation of exchange on London in Xew York is limited 

to the actual cost of shipment of bullion and the expense for 

interest while in transit, approximating f of 1 per 

Fluctuations QQnt, abovo or below the mint parity — whereas in 

in Exchange ^ . 

the case of Berlin or Paris exchange the fluctua- 
tions have a wider scope, dependent upon the premium charged 
or allowed for gold, and have been known to approach a variation 
of pretty nearly one per cent, above or below the mint parity. 



\ 



466 FOREIGN EXCHANGE. 

Foremost among the exchange centers of the world stands 
London^ with the Bank of England^ surrounded by a most won- 
derful group of Joint Stock and private Banks. The other 
European centers are Paris with the Bank of France^ and Berlin 
with the Imperial Bank. These three institutions stand guard 
over the financial destinies of the worlds and their 
Exchange wccklj statements are eagerly scanned by finan- 

ciers as the true trade barometer. So sensitive, 
indeed is the world of finance that when occasionally a meeting 
of the Board of Directors of the Bank of England is extended a 
few minutes beyond the usual time this fact immediately be- 
comes a cause for apprehension, and it is said that the discussion 
of an irrelative subject among the directors after the close of a 
board meeting at a critical period almost caused a panic on the 
Stock Exchange. These centers are engaged in a constant 
warfare, one against the other, and while the hostilities are of a 
peaceable nature, the methods employed are quite drastic at 
times; still, when a common danger threatens, these three 
great institutions are ever ready to extend to each other a 
helping hand. 

Owing to the peculiar features of the banking laws of the 
United States, conditions in this country are somewhat different 
and not so easily regulated in times of stress as they are abroad. 
Our clearing houses act as a unit and are the determining 
factors when decisive steps have to be taken for the protection 
of the commercial community. 

Gold, as has clearly been demonstrated, performs the func- 
tion of settling international trade balances best, and upon refer- 
ence to the financial papers of the day it will be seen that there 
is constantly a movement of the metal — flowing 
Ebb and Flow regularly through the arteries of trade, subject 
to natural laws as unalterable as those in the 
material world, and after having performed its duties in revivi- 
fying commerce returning to the exchange centers of the world. 



EXCHANGE CENTRES. 467 

only to be ready at a moment^s notice to again go forth on its 
mission to benefit the human race, by developing the resources 
of distant parts of the world, — perhaps the wilds of Canada or 
the rice fields of India, or to supply the sinews of great enter- 
prises such as transcontinental railroad lines. 



INDEX. 



PAGE. 

Accommodation Paper 278 

Agriculture 138, 400 

Alaric 29 

Alaska, Purchase of 135 

Alexandria 15 

America, Discovery of 39 

American Colonies 106 

American Ships, Capture of 116 

Amsterdam, a Commercial Cen- 
tre 53 

Amsterdam, a Financial Center. 169 

Annuities 383 

Anti-Bubble Act 214 

Arbitrage 455 

Assessment Insurance 383 

Assets, Shrinkage of 335 

Bank Clearing House 262 

History of, 263; Functions of, 
266. 
Bank Discount, Desirable Paper 

for 274 

Bank Scandals = . 227 

Bank War 229 

Bank of Venice 34, 168 

Banks, Private 245,246 

Savings, 246, 247: State, 221, 
244, 245; Branches of, 210. 

Banking, Colonial 21S 

Banking Feature of Foreign 

Commerce 449 

Bank of England 95, 179 

Monopoly of. 180; Divided Into 
Two Departments, 182; Notes, 
183; Issue Department, 185; 
Banking Department, 187; Re- 
serve, 188; Keeper of Reserves, 
190; Rate of Discount, 192; A 
Private Corporation, 193; Man- 
agement, 194. 

Bank of North America 215, 216 

Bank of the United States. .109, 120 
First, 217, 218; Renewal of the 
Charter, 221; Second, 223, 224, 
225; Jackson's Hostility to, 
228; Second, Failure of, 230. 

Barbarian Invasion 28 

Barter 148 

Bear Market, A 394 

Berlin Decree 117 

Bills of Credit 215 

Bills, Documentary 277 

469 



PAGE. 

Bimetallism »♦..»».».. 166, 167 

Black Friday 184 

Blount, John 96 

Board of Directors 293 

Board of Underwriters 362 

Bonds 319 

Government, 319; Refunding, 
320; Coupon, 321; Municipal, 
321; Registered, 321; State, 321; 
Income, 322; of Private Cor- 
porations, 322; Security for, 
323; Debentures, 323; Collat- 
eral Trust, 323; Foreclosure 
under, 325; State, 329; Rail- 
road, 332. 

Bond Issue, Floating of 323 

Bonded Warehouses 415 

Classes of, 416. 
Borrowing and Lending Money. . 271 

Borrowing, Limit of 273 

Bounty 440 

Branch Banks 175 

Britain, Under Roman Rule . . 82 

Bruges, a Market 65 

Bucket Shops 414 

Bulls and Bears 393 

Bulls and Bears of the Produce 

Exchange 409 

Bull Market, A 394 

Buying and Selling Stocks 396 

By-Laws 294 

Carriers of Produce 402 

Carthaginian Commerce 19 

Call Loans 275, 399 

Cape Route, Discovery of 46 

Cash Grain 407 

Canadian Banking System.. 206, 231 
Inspection, 207. 

Centennial Exposition, 1876 143 

Certificates, Gold and Silver 243 

Change of Commercial Centers.. 45 

Charlemagne 31 

Checks and Drafts 263, 461 

Circular Note 460 

Civil War, The 131 

Clay, Henry 221 

Clearinghouse 262 

Certificates, 266; Matter for 
Clearing, 268. 

Clipper Ships 122 

Coasting Trade of United States 446 



470 



INDEX. 



PAGE. 

Colbert, Commercial Policy .... 69 

Cold Storage Center 419 

Cold Storage Warehouses 418 

Commerce, American 439 

During Napoleonic Wars, 100; 
Revival of, After the Adoption 
of the Constitution, 109. 

Commercial Agencies 340 

Commercial Credits 33(5 

Commission Merchant, The 403 

Comptroller of the Currency .... 235 

Confederation, American 108 

Coinage 151, 161 

Coin, Subsidiary 156 

Collection Laws 342 

Cotton Gin, The 112 

Cotton Industries 133 

Co-Insurance 363 

Consular Invoices 447 

Consular Officers, Duties of .... 447 

Consular Service 446 

Continental Money 108 

Cooley, Thomas M 312 

Corner 411 

Corn Laws 100 

Corporations 282 

Close, 282; Formation of, 283; 
Private, 282; Officers of, 294; 
To Control By-Products, 301; 
Consolidation of, 308; Insol- 
vency of, 314; Credit of, 343. 

Corporate Manipulations 302 

Corporate Merger, Illegal 303 

Corporate Seal 298 

Corporate Signature 298 

Countervailing Duty 440 

Covering 410 

Credit Associations 342 

Credit, Limit of 336 

Currency, Elasticity of 185, 209 

Days of Grace 464 

Debentures 323 

Decay of Commerce 30 

Delivery Day 410 

Deposits, Removal of by Presi- 
dent Jackson 229 

Differential Rates 430 

Dividends 290 

Stock, 290; Fictitious, 290; Il- 
legal, 291. , 

Dominion Notes 212 

Drafts, Time 461 

Dutch, Character 53 

In Possession of Carrying 
Trade, 53; Shipbuilders and 
Navigators, 53; Commerce in 
the East, 54; East India Com- 
pany, 54; Colonies in the West, 
54. 

Dutch Colonial Policy 55 

Duty, Countervailing 440 

East India Company of England 

89, 90, 91 

Edict of Nantes, Revocation of. . 71 

Egvptian Commerce 14 

Eighty Per Cent Clause 363 

Embargo Act 117 



PAGS. 

Endless Chain, Operation of .... 242 
England, Ancient Commerce of. 81 
A Manufacturing Nation, 93; 
Change from Protection to 
Free Trade, 102. 

England's Colonial Policy 97, 107 

Present Commercial Condition, 
105. 

English Banking System 95 

Growth of Colonial Posses- 
sions, 101; Eastern Posses- 
sions, 103; Carrying Trade 
Prior to 15th Century, 86; In 
South Africa, 104; Prohibition 
of the Exportation of Machin- 
ery, Tools, etc., 107. 

English Manufactures 94 

English Navigation Acts 93 

Equal Mileage Rates 435 

Equity of Redemption 352 

Erie Canal 120 

Exchange, Fluctuations in 465 

Exchange Centers 466 

Exchange Parity 458 

Exports, Colonial 106 

Exports and Imports 136, 137 

Exposition in New York 129 

Factory System, The 98 

Fairs of Middle Ages 83, 84 

Fall of Rome 29 

Fast Freight Lines 437 

Feudal System 31, 84, 153 

Fire Insurance, Origin of 354 

Lloyds, 355; Mutual Com- 
panies, 355; Stock Companies, 
356; Rates, 357, 360; Basis 
Rate, 358; Floating, 365; 
Blanket Policy, 365; Owner- 
ship, 366; Loss Payable Clause, 
368. 

Flanders, Commerce of 64 

Manufactures of, 64; Decline 
of, 65. 

Florence 41 

Florence, Bankers of 42, 43 

Fluctuations in Exchange 465 

Foreclosure 317, 352 

Foreclosure, Fraudulent 318 

Foreign Commerce 438 

Banking Feature of, 449. 

Foreign Exchange 450,452 

French Colonial Possessions 67 

French Colonial Trade 79 

French Commerce, Beginning of. 65 
Recent, 78. 

France, Reign of Louis XIV 66 

Possessions of, in America, 68; 
Colbert as Minister, 66; Con- 
flict with England in America, 
69; Condition under Louis XV, 
72; Bank of, 173, 177; Func- 
tions of the Bank, 174. 

French Expositions ..78, 80 

French East India Company . . 66 

French Revolution 112 

Causes of, 74. 



INDEX. 



471 



PAGE. 

Free Banking * . . ♦ 231 

Free Warehouses 418 

Freight, Classification of 432 

Object of Classification, 433; 
What the Traffic Will Bear, 
434; Cost of Service, 434; Dis- 
criminations, 433; Long and 
Short Haul, 436. 
Freight Rates, How Determined. 434 
Competition, 435; Equal Mile- 
age, 435. 

Freight Traffic 428 

Futures 407 

Trading in, 409. 
Genoa, Conflict with Venice. .36, 37 
Rival of Venice, 37, 38; Com- 
merce of, 37. 

Genoese Industries 38 

Finance and Laws, 38. 

German Banking 196 

German Commerce 59 

Revival of, 60. 
German, Development of Home 

Industries 61 

German Imperial Treasury 

Notes 200 

German Money System, Elastic- 
ity of the Currency 198 

Germany, Present Commerce of. 62 
Practical Education in, 63. 

Glass, Venetian 34 

Gold, Discovery of in California. 128 
Ebb and Flow, 466; Legal 
Value of, 452. 

Gold Shipments 456 

Government Bonds 328 

Grain Inspection 412 

Greek Commerce 17 

Gresham's Law 159 

Hansa, The 56 

Hansa Congress 58 

Hanseatic League 56 

Effect of, 58; Object of, 83. 

Hamilton, Alexander 216 

Report of, 217. 
Hamilton's Financial System . . 109 

Hawaiian Islands 144 

Henry VIII 87, 88 

Holland, Lands Below Sea Level 53 
Home Industries, Prior to 1812. . 115 

Immigration 113 

Implied Powers, Doctrine of, 110, 218 

Import and Export Duties 439 

Incomes, Purchase of 387 

Independent Treasury Act .... 254 
India, Acquisition of by England 92 

Industrials, Financing of 309 

Inspection of Grain 412 

Insurance, Fire 354 

Insurance, in Cold Storage Ware- 
houses 422 

Industrial Insurance 377 

Interchangeable Values 453 

International Law 445 

International I n d e b t e dness, 
Liquidation of 454 



PAGE. 

International Banking 454 

Interstate Commerce Law 478 

Inventions in 18th Century 99 

Inventions l.SO 

Invincible Armada 51, 87, 88 

Invoices, Consular 447 

Iron and Steel 134 

Jacquard Loom 77 

Jews, Banishment of 85 

Expulsion by Spain, 51. 

Kiln Dried Grain 413 

Land Bank, John Law's 72 

In Boston, 213; of 1741, 214. 

Land Tenures in France 76 

In the United States, 141. 

Law, International 445 

Law, John 72, 73 

Law of Probabilities 370 

Life Insurance 370 

History of, 371; Two Methods, 
371; Stock and Mutual Com- 
panies, 372; Insurable Interest, 
372; Policies, 373; Limited Life 
Policies, 374; Endowment Pol- 
icies, 374; Joint Life, 376; Pre- 
mium Loan, 376; Payment of 
Premiums, 378; Dividends, 378; 
Incontestability, 380; Non-For- 
feiture, 380; Loans, 381; As an 
Investment, 381; Surrender 
Value of Policies, 382; An- 
nuities, 383. 

Light Houses, Buoys 443 

Lisbon, a Commercial Center ... 48 
Port of. Closed, 52. 

Listing Securities 395 

Loans, on Collateral 275 

Speculative, 276; on Real Es- 
tate, 280. 

London, a Financial Center 178 

The World's Clearinghouse, 
178. 

London Stock Exchange 385 

Long 394 

Longs and Shorts 410 

Long and Short Haul 436 

Loss Claims 368 

Loss Payable Clause 368 

Louis XIV, Persecution of 

Huguenots 70 

Louisiana, Purchase of 113, 114 

Manufacturing Bonded Ware- 
houses 417 

Margins 404 

Buying on, 389, 397. 

Medicis, The 42 

Medium of Exchange 149 

Merchant Marine 123 

Mercantile Agencies 341 

Reports of, 342. 

Merger, Illegal 303 

Mexican Cession 127 

McKinley Bill, The 139 

Milan 43 

Mint, Establishment of Ill 

Mint Parity 453 



472 



INDEX. 



PAGE. 

Mississippi Company, The 73 

Money 147 

Essentials of, 151; An Instru- 
ment of Commerce, 152; A 
Medium of Exctiange, 153; A 
Measure of Value, 153; A 
Standard of Value, 154; A 
Store of Value, 156; Paper, 
Kinds of, 158; Representative, 
160; Volume of, 162, 176; Sub- 
stitutes for, 163. 

Money Market 272 

Monometallism 165 

Moors, Expulsion of 50 

Mortgages 333, 334 

Recording of, 353. 

Mortgages, Farm 334 

Mortgage Securities 331 

Mortgage and Trust Deeds 351 

Morris, Robert 215 

Napoleon's Policy 75 

Napoleanic Wars, Effect of .... 116 

Napoleon III 77 

National Banking Act 257 

National Banking System ..233, 234 

National Debt 124 

National Reserve 241 

Navigation Acts 102 

Navigation and Tonnage Acts.. 441 
New York Stock Exchange .385, 386 

Ninety-Nine Year Leases 349 

Norman Conquest 84, 85 

Note Brokers 278 

Notes, United States 242 

Notes, Convertible and Incon- 
vertible 160 

Circulating, 175; Redemption 
of, 176. 

Order in Council 117 

Over-Certification of Checks 398 

Pacific Railroad 135 

Packing Goods 448 

Panic of 1837 125,231 

Of 1857, 129, 130; of 1819, 226; 
of 1873, 138; of 1893, 268. 

Paris Bourse 385 

Partnership, Credit of 843 

Peel, Sir Robert 181 

Petroleum 134, 135 

Philippine Islands 145 

Phoenicians as Navigators 145 

Piracies 83 

Pisa 40, 41 

Pooling 427, 428 

Portuguese Trade 47 

Postal Aid Law 442 

Postal System, Origin of 94 

Precious Metals, as Money 50 

Preferred Stock 286 

Creation of, 287. 

Private Banks 245, 246 

Private Warehouses 417 

Produce Exchange, The 400 

Produce Exchange Centers .... 401 
Produce Exchange, Benefits of . 406 
Organization of, 402. 



PAGE. 

Prohibition of Colonial Manu- 
factures 107 

Promotion 310 

Protective Duties 121, 122 

Punic Wars 20, 21 

Purchase and Sale of Real Es- 
tate 345 

Puts, Calls and Spreads 394 

Queen Elizabeth 87, 88 

Prosperity, 89; Monopolies un- 
der, 89. 

Railroading 423 

Railroads 126, 140 

Ownership, 425; Capitalization, 
425; Efficiency, 426; Consolida- 
tion, 426; Pooling, 427, 428. 

Railway, Associations 427 

Rates of Exchange 456 

Ratio 165 

Real Estate, Titles 345 

Surveys, 346; Subdivisions, 347; 
Values, 347. 

Real Estate Contract 349 

Receiver 313 

Duties of, 313; Friendly, 314. 

Receiverships 315 

Receivers of Produce 402 

Reciprocity 139, 140, 144 

Recording Deeds and Mortgages. 353 

Refrigeration 420 

Regulator of the Currency. .223, 227 

Reichsbank 197 

Controls other Banks, 200. 
Reorganization of Corporations. .326 
Committee, 316; Methods of, 
316. 

Reserve 238 

Revolutions, Period of 98 

Rialto, of Venice 35 

Roman Industries 22 

Roman Supremacy 22 

Roads, 23; Commerce, 24; 
Slavery, 25, 26. 

Russian Money System 201 

Russian Bank, Branches of 202 

Russian Loans 203 

Russia, Imperial Bank of 201 

Safety Fund System of New 

York 230, 231 

Savings Banks 246, 247 

Mutual, 248; Private, 249. 
Saxons, Normans and Danes.... 82 
Scotland, Banking System of . .204 
Elasticity of Its System, 204; 
Cash Credit Accounts, 205; 
Branch Banks, 205. 

Securities 328 

Local, 330; Mortgage, 331; 
Speculation, 384. 

Securities, Companies 303 

Second United States Bank 124 

Sereno S. Pratt 387 

Shipbuilding 106 

Ships, Registration of 443, 444 

Entrance of, 450; Clearance of, 
451. 



INDEX. 



473 



PAGE. 

Ship Captains, Discretion of 448 

Shippers of Produce 402 

Short 393 

Signed Statements 341 

Silver, Demonetization of 157 

Sinlsing Fund 292 

Slavery 121 

South Sea Bubble 96 

Spain, Decay of Commerce 51 

Treatment of Dutch, 52; Treat- 
ment of Cuba, 52. 

Spanish Colonial Policy 50 

Spanish Commerce 49 

Specie Payments, Suspension of. 222 
Resumption of, 137. 

Speculation, In Securities 388 

Is it a Benefit, 388. 

State Banks 129, 244, 245 

State Bonds 329 

Steam Engine 102 

Steamboat, First 114 

Stock 285 

Watered, 288; Fluctuations in, 
391; Preferred, 286; Treasury, 

Stock Broker 393 

Stock Exchange, The 384 

A Place for Investments, 386; 

A Market for Securities, 386. 

Stock Gambling 390 

Stocks 333 

Storage and Warehousing 415 

Storekeeper 416 

Subsidy 441, 442 

English, 442; French, 442; 

United States, 442. 

Subsidiary Corporations 300 

Sub-Treasury System 241 

Sub-Treasuries 258, 260 

Suffolk Bank System 230 

Surplus 292 

Tariff and Tonnage Acts Ill 

Telegraph 126, 127 

Tickers 399 

Tonnage Laws 122 

Trade Follows the Flag 443 



PAGE. 

Trade Marks 448 

Trade News, Prices Based On . . 405 

Traffic Associations 427 

Tramp Steamers 442 

Transportation by Rail 423 

Development of, 424. 

Travelers' Check 460 

Travelers' Letters of Credit 460 

Treaties, Kinds of 445 

Treasury Stock 287 

Treasury Notes 255 

Trust 305 

How Formed, 307; Illegal, 308; 

Powers of, 307. 
Trust Companies 249 

Functions of, 250. 

Time Drafts 461 

Underwriting 310 

United States, Present Com- 
merce 145, 146 

United States Bank, First. .217, 218 
Branches of, 219; Renewal of 

Charter of, 221. 
United States Treasury 252 

Establishment of, 253. 

Usury, A Crime 38 

Values, Interchangeable 453 

Venice, Sources of Wealth 33 

Decline of, 36. 

Venetian Commerce 33 

Venetian Manufactures 33 

Venetians, Originators of Science 

of Double Entry Book-Keeping 35 

Visconti of Milan 45 

Voting Trust 303 

Wages, Rate of 144 

Warehouse Receipts 277 

As Security, 421. 

Watered Stock 288 

Wild Cat Banks 231, 232 

Wisselbank 171, 173 

Wool, English 85 

World's Columbian Exposition, 

1893 143 

Zollverein, The , 61 



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